Interview with Alternative US Economist Paul Craig Roberts
Dr Paul Craig Roberts is a well-known economist who received his PhD from the University of Virginia. He was, in the early 1980s, Assistant Secretary of the Treasury for Economic Policy under Ronald Reagan. He has been the associate editor of the Wall Street Journal. He has been a columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His internet columns at www.paulcraigroberts.org have attracted a following worldwide. Do check out his website!
But none of this explains why we are interviewing him over at CULTURE ON THE OFFENSIVE. The reason is that Dr Roberts has proven himself to be a critical and free thinker. Despite being appointed by Ronald Reagan in the 80s and working for various right-wing news outlets, Dr Roberts quickly distanced himself from the presidency of George W. Bush. Further, unlike most republicans of today he does not accept laissez faire capitalism and he is anti-war. We also reject laissez faire capitalism and see war as a last resort. But most of all, we are interviewing Dr Roberts because, like us, he is difficult to classify in the standard political taxonomies. He is not right-wing, he is not left-wing, he is not a libertarian, and he is also not an authoritarian. He is his own man.
Our interview will concentrate on what Dr Roberts knows best, Economics. The reader should see this as one Economist’s alternative perspective on the United States economy and the world’s economy. He does not paint a happy picture. But it is better to be right. We would always prefer the red pill.
Here’s our conversation.
Culture On The Offensive team (COTO): Did the United States start as a free market capitalist country? If no, when did it become one? If yes, what changed precisely? What is it about the free market capitalism of today that is different from yesteryear?
PCR: The US began as a British colony prior to the development of industrial capitalism. Banking mainly financed seafaring trade. During the colonial period and almost to the end of the 19th century, land was available for people to take from the Indians and to move onto. Therefore, there was not much of a labor market. In order to produce cotton and tobacco for export from the fertile lands in the southeastern US, the British colonists had to bring in slaves to do the work. The southern US inherited this arrangement.
Free market capitalism has never existed anywhere. The well-connected both in Great Britain and in the United States used government to bestow upon them privileges. Unregulated capitalism was exploitative. By 1890 in the US, it was necessary to do something about monopoly, control of markets, and price fixing. Senator John Sherman got the Sherman Antitrust Act passed. Today this Act, which during an earlier part of my life prevented mergers that resulted in economic concentration such as the mega-banks today that are “too big to fail,” appears to be a dead letter law. It is not enforced.
In the 1920s (“the roaring twenties”) sharp financial practices are believed to have contributed to the 1929 stock market crash and onset of the Great Depression of the 1930s. In 1933, after the failure of thousands of banks, the Glass-Steagall Act was passed. The Act separated commercial from investment banking. Under the Act, a bank could be either a commercial bank whose ability to lend depends on the extent of its deposits, or it could be an investment bank which could not accept deposits.
In 1999, near the end of the Clinton regime, lobbyists for the large banks succeeded in getting the Glass-Steagall Act repealed. Federal Reserve chairman Alan Greenspan, a disciple of Ayn Rand, and economists working for the large banks or currying favor with them, declared that “financial markets are self-regulating.” When President Bill Clinton signed the repeal of the Glass-Steagall Act, he said the repeal would “enhance the stability of our financial services system.”
Obviously, a bank lobbyist wrote those words for Clinton. That Clinton, a poor boy from Arkansas, signed the repeal is one reason he and Hillary today have a net worth of many millions of dollars.
Far from stabilizing the US financial system, the repeal of Glass-Steagall, along with the deregulation of derivatives, national branch banking, the securitization of financial instruments, and increased debt leverage, destabilized the financial system. The result was the worst financial crisis in US history, causing the taxpayers to hand over $750 billion to a handful of irresponsible banks and for the Federal Reserve to bail out the banks by printing close to $4 trillion dollars (that’s 4,000,000,000,000 dollars) with which to support the balance sheets of a handful of mega-banks that under the Sherman Antitrust Act would not have been permitted to be so huge.
What has happened in the US since the Clinton regime is that everything that made capitalism workable for everyone has been repealed. Today capitalism works only for the One Percent.
COTO: Why isn’t outsourcing free trade? Why does the dogma of comparative advantage, which we’re told in college, fail to be true for outsourcing?
PCR: Free trade, as put forth by David Ricardo, specifies that it depends on a country’s capital finding its comparative advantage at home and locating domestically in the areas where it has comparative advantage. In Ricardo’s example, English capital should produce wool and Portuguese capital should produce wine.
Ricardo specifies that if instead capital leaves the domestic economy in pursuit of absolute advantage abroad in lower factor cost, there are no mutual gains from trade.
Therefore, jobs offshoring which consists of corporations using foreign labor to produce the goods and services that the corporations sell to their domestic markets is a manifestation of absolute advantage, not comparative advantage.
Moreover, Ralph Gomory and William Baumol in their book, Global Trade and Conflicting National Interests (MIT Press, 2000) prove that even Ricardo’s idea of free trade is a special case that does not hold in most situations.
COTO: Isn’t the gain from outsourcing cheaper production? The US benefits from cheaper production and China benefits from having manufacturing jobs for their excess labor. That’s what we’re told. We’re also told that if the products were made in the US or Europe, they would be so expensive no one could afford them. Is this nonsense?
PCR: Lower production cost does not necessarily mean lower prices. It means higher profits for the corporation, performance bonuses for executives, and capital gains for shareholders. Until US corporations offshored their production to China, China did not know how to produce the products. Moreover, China had no brand names with which to replace American products and still doesn’t. Apple’s products are produced by Chinese labor in China, but are still Apple’s property and brand. By offshoring their production, corporations actually harm the US economy and their own domestic market. Few of the laid off US workers find comparable paying jobs. Thus domestic consumer demand is lower than would be the case. Also, the state, local, and federal tax base shrinks due to lower paying jobs, but assistance to laid off workers, such as food stamps and unemployment benefits, raise government deficits, and this can lead to state and local governments cutting back on pension payments to retired workers, further reducing consumer demand.
COTO: The new jobs that were supposed to replace the factory jobs never materialized. Why is this? And what kinds of jobs were economists expecting?
PCR: The economists who promised better jobs as replacement for “dirty fingernail jobs” were in the pay of the corporations. They simply made it up. It was all a lie from start to finish.
COTO: Taken abstractly, what is wrong with the idea that new jobs would replace the lost factory jobs?
PCR: Essentially any manufactured product can be offshored, so replacement jobs are unlikely to occur in manufacturing. Essentially any tradable professional skill job, such as software engineering, research, design, information technology, can be done abroad. This limits replacement jobs to domestic service jobs that have to be performed on site, such as bartenders, waitresses, retail clerks, health care, and construction. These jobs are lower productivity, lower value-added jobs and, therefore, lower pay jobs. Moreover, the same corporate desire for lower labor costs and higher profits results in corporate support for immigration and work visas in order to have foreigners who can be paid less for the jobs that cannot be offshored.
The claim was made that the replacement jobs would be high-tech jobs innovating new technologies and new products. The US would become an innovative economy, and the Chinese would produce the products that Americans innovated. It is not realistic that millions of laid off workers would become entrepreneurs and inventors. The claim of replacement jobs was just a cover story to make Americans accept the job losses.
COTO: Is outsourcing of US and European jobs good for the Chinese people? If so, could an argument be made that outsourcing overall is beneficial for the world?
PCR: This question assumes that the world consists of a single country or political entity. However, the world consists of different countries under different governments. China is believed to have benefitted from the US offshoring its jobs to China, and the US has clearly been hurt.
COTO: Can we not ask the question, ‘what is better for the world as a whole?’ Maybe outsourcing benefits the Chinese more than it hurts us. If so, maybe it’s better overall.
PCR: Representative governments are supposed to represent the country’s own citizens, not harm them for the benefit of foreigners. Moreover, it is not necessarily a benefit to China to have an economy dependent on the export of offshored products to the US where the domestic market is in decline from job loss and stagnation and decline in consumer spending power. China would have a stronger economy if its growth was based on developing China’s domestic consumer market.
The most likely case is that offshoring harms both the US and China and only benefits the corporation executives and owners.
COTO: To what degree did automation and technology compliment the deleterious effects of outsourcing on the job market and consumer incomes?
PCR: Robotics is hanging over worldwide employment. As robotics intends to replace most human employment, and as robotic patents are held by only a few, the concentration of all income into the hands of a tiny number of people implies a massive reduction of human life on earth. There can be no future for humanity unless robotics patents are socialized.
COTO: Automation seems to hurt the economy. It doesn’t create enough new jobs to replace the ones lost. Why do so many economists argue that automation is good for the economy?
PCR: Automation is used in aspects of mass production that can be standardized. Economists regard it as a substitution of capital for labor that improves the productivity and thereby wages of the remaining labor. Automation reduces the demand for labor in those areas that can be standardized, but we have survived with labor-saving techniques for a long time.
COTO: Was job loss from automation offset by strong labor demand in a growing economy?
PCR: Automation did not result in entire plants closing and moving their production abroad. Moreover, automation raised the productivity, and thereby wages, of the remaining workers in the plants. The displaced workers could find new jobs in a growing domestic economy.
COTO: Explain what happened in 2008. Why did the crisis occur?
PCR: The crisis occurred because the financial markets were deregulated and because federal officials such as the Treasury Secretary and Federal Reserve Chairman and bought-and-paid-for economists declared that “financial markets are self-regulating.”
COTO: Should we have let the banks fail? Some argue that doing this would have made the situation even worse. If this is false, why?
PCR: The banks should have been allowed to fail. However, former bank CEOs were running the US Treasury and chose instead to protect the banks that they had put into financial trouble. Consequently, the principle justification for capitalism was destroyed: Capitalism is supposed to weed out inefficient companies, but banks that produced losses, thereby misusing society’s resources, were allowed to stay in business.
COTO: What would have happened if we had allowed the banks to fail? Wouldn’t it cause a big recession/depression? Wouldn’t doing this wipe out a lot of money? Should the government had done anything? What if they bailed the people out instead?
PCR: The banks’ shareholders and bondholders would have lost money. Executives would have been replaced, and the banks reorganized. Depositors are protected under federal law, so the losses would fall on the managements and investors who took excessive risks.
The US did experience a big recession from the financial crisis that the banks caused. A lot of money was wiped out as a result of debt instruments, such as mortgage derivatives, on the books of the banks. A massive amount of new money was created by the Federal Reserve in order to replace the banks’ losses. US economic policy focused on saving the One Percent, not the 99 percent.
COTO: We’re told we’re in a recovery, that unemployment is 5% or less, and that jobs growth is very good. Is this data misleading? Why?
PCR: The 5% US unemployment rate is obtained by not counting the unemployed. Job search is expensive both financially and emotionally. Many job seekers become discouraged and cease searching. If you have not searched for a job in the past four weeks, you are not counted as being unemployed in the labor force. If short-term (less than one year) discouraged workers are counted, as the government does count in its U6 measure, the US unemployment rate is about double the 5% figure. If long-term (more than one year) discouraged workers are included, John Williams of shadowstats.com shows us that US unemployment is currently about 23%.
The alleged recovery is based on a measure of inflation that is designed to understate inflation. Therefore, when nominal Gross Domestic Product (GDP) is deflated to arrive at a measure of real GDP, price increases are misrepresented as increases in real output. The growth in real output that signifies economic recovery is a mirage
The payroll jobs reports are estimates of the number of jobs, not the number of employed. Many of the jobs are part-time, and one person might have two or more of the jobs. Additionally, according to John Williams of shadowstats.com, the Bureau of Labor Statistics (BLS) adds about 200,000 jobs each month to the payroll jobs as an estimate of the number of unreported new jobs created by new business start-ups in excess of the number of unreported lost jobs from recent business failures. This add-on number accounts for the reported March gain in payroll jobs.
If we assume that the payroll jobs reports are correct, the reports show that new jobs are concentrated in lowly paid domestic services, such as retail clerks, waitresses, and bartenders. This would indicate that the labor market in the US is becoming Third World in character.
COTO: Whenever we look at the jobs reports in the US we come away quite confused. It seems waitresses and bartender jobs are a being created at an incredible pace. Could this just be caused by businesses cycling workers? If not, how is it possible? Is it the 1% going out to eat all the time? It’s very odd, because low wage jobs shouldn’t support all these restaurants. Not everyone can be a waitress or bartender, but that seems to the direction of things. Is there anything else you can add to this?
PCR: As John Williams of shadowstats.com has emphasized, it is unclear that the reported new jobs are actually there. The jobs might only be the creation of the BLS add-on factor explained above and manipulation of seasonal adjustments.
COTO: How do you see the future? Are you positive or negative and why?
PCR: I am concerned that the Western economies are headed toward crisis, because the economies have been deregulated, privatized, and organized to serve the One Percent and not society.
COTO: What would be the best economic system, socialism, capitalism, or what? Is there one economic system that is always best or does it depend?
PCR: The best economic system would be a mixture of capitalism and socialism, with people free to start businesses but with monopolies regulated and transportation, public utilities, education, and health care socialized.
COTO: Do economies always need to be expanding? If we lowered the birth-rate, could a 1% GDP be adequate for people to find work and have good lives?
PCR: Ecological economists, such as Herman Daly, whose work I support in my book, The Failure of Laissez Faire Capitalism, make it clear that nature’s capital is being exhausted without being counted as a cost in the production of Gross Domestic Product. As all the costs are not measured, we do not know if an increase in GDP cost more than it is worth. Daly and other ecological economists argue that humanity needs to abandon growth and focus on creating a “steady state” economy that allows humans to maintain a livable life instead of seeking an ever higher amount of consumption.
COTO: Are you in favor of social welfare states where the poor are protected from poverty and homelessness through government assistance? If so, why; if not, why not.
PCR: Economies are not stable. They have their ups and downs. Changes in technologies and consumer behavior have employment impacts. So does foreign trade. Illnesses and disabilities strike unequally. Therefore, there are always people who are injured by economic changes and by health problems, the treatment of which exceed the capability of average incomes. If a society is a society rather than a collection of isolated beings, it must protect those hurt by these differential developments.
COTO: In the upcoming US election, which of the major candidates do you think would be best for the economy? Why?
PCR: On paper Bernie Sanders would be the most beneficial for the people. But the office of president is not sufficiently powerful to overcome the power of the special interests who rule in their own interests. Change in America requires either collapse or more extreme suffering that ends in revolution.
COTO: Chomsky says he is pessimistic about the human intellect but optimistic about the human will. Do you agree with this? Is there anything that makes you optimistic?
PCR: There is not much to be optimistic about. Throughout the West, representative governments are failing. The governments of Ireland, Greece, and Portugal sacrificed the welfare of citizens to the financial interest of foreign banks. Italy and Spain seem destined for the same fate. European, Australian, and Canadian governments are subservient to Washington’s foreign policy. Their support for Washington’s wars has resulted in millions of refuges from these wars over running Europe. Alleged terrorist events provoked by Washington’s wars have resulted in bombings that serve as an excuse for the introduction of police state measures. Washington’s hegemonic policy is pushing Europe into conflict with Russia and brewing problems with China. Trans-Pacific and Transatlantic “partnerships” are elevating corporate profits above national sovereignty.
There is some sign of hope in the US presidential primary elections. Voters are showing preference for candidates who are not part of the party establishments, perhaps reflecting voters’ hopes that Trump and Sanders are independent of the powerful private interest groups that control the US government. The preference for Trump and Sanders persists despite media demonization of both candidates. Some Americans are realizing that the media delivers government and corporate propaganda, not the facts.
In Europe dissident political parties are gaining influence from voters’ awareness of their loss of national identity. In some European quarters the thought is rising that NATO creates more security risks for Europe than it protects against. Possibly, Europeans could return to foreign policy independence. If European countries restored their independence, Washington would have to abandon a foreign policy based on threats and violence.
There is a possibility of US economic collapse. The massive increase in US dollars created by the Federal Reserve in order to protect the few mega-banks was not accompanied by a comparable increase in real goods and services. The dollar has kept its exchange value, because other large currencies (the Japanese yen and the euro) are also being printed in copious quantities, in effect, rigging the US dollar’s exchange value. Bond prices are rigged by central banks printing money with which to purchase bonds. The liquidity supplied by central banks keeps stock prices and price/earnings ratios high, and some suspect that the Federal Reserve prevents large corrections by purchasing S&P futures when the stock market turns down. There is convincing evidence that massive shorting with uncovered bullion futures contracts are used to keep gold and silver prices from rising. Manipulated economic data are used to create the appearance of economic recovery and strong employment.
The economy seems to be a house of cards. A collapse could result in economic and political reforms that restore accountable government and reform capitalism so that it works for everyone and not merely for the One Percent.
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