The Third Depression

A. Scott Piraino

The US economy as we know it will soon collapse. This has happened before, twice, and history is about to repeat itself again. This will be the third depression the United States has suffered, and it will probably be the worst.

In the Gilded Age of the 1890’s, and the Roaring 1920’s, improvements in technology and industry fueled rapid economic expansions. Capitalism was revered as the new engine of progress, while onerous government regulations were seen as an impediment to growth. These were days of “laissez faire” economics and unscrupulous robber barons.

Inevitably there was a growing disparity in incomes, but the majority of Americans were more concerned with getting rich than helping the poor. Most investors believed these economic booms would last forever, but this optimism proved to be their undoing as exuberance bid up share prices. Inevitably the day came when prices fell, and markets collapsed.

The Gilded Age ended with a monetary crisis in the first decade of the twentieth century. Incoming President Teddy Roosevelt was forced to borrow money from wealthy elites to finance the government. The Roaring Twenties ended in a more spectacular fashion, a stock market crash in 1929 ushered in the Great Depression.

Depressions are created when money disappears. People suddenly become poorer, and they spend less money. With less demand for goods and services, production declines and prices fall, causing a downward spiral of unemployment and falling incomes.

Our country has endured deflationary periods after numerous boom and bust cycles, most notably during the Great Depression. But the coming collapse will be different. Debt, and our dependence on imported oil and manufactured goods are the reasons the Third Depression will be different, and much worse.

The U.S. budget deficit climbed to a record high $412 billion last year, which was surpassed by our trade deficit of $496 billion, also a new record. This year’s deficits will be even larger. The Bush administration has projected a budget deficit of $390 billion for the year, not including $80 billion for the war in Iraq. Meanwhile our trade deficit is growing even faster, at an annual rate of $592 billion.

To finance our current account deficit, we have to import three billion dollars in cash, every working day. Our deficits now consume 80 percent of the entire world’s net savings, and our demand for debt is increasing. This is unsustainable.

Interest rates on our national debt are low only because bondholders are confident in our ability to make payments. The US dollar maintains its value on world markets because foreign nations believe we can afford our appetite for imported goods. As our economy falters and our deficits rise, the world is losing faith in our ability to finance our deficits.

This is why world markets are beginning to reject the US dollar. The dollar has lost about one third of its value against other major currencies since 2002, and has been falling at a much faster rate in recent months. The danger of course is that as the dollar declines in value, it becomes less profitable to hold, and the incentive to sell dollars increases.

If enough central banks and foreign investors began unloading US assets, other investors and financial institutions would see the dollar rapidly losing value. They would have to sell their US securities quickly, to protect themselves from further losses on their dollar denominated holdings. There would be a financial panic, and the US dollar would collapse.

This danger is very real, and our declining dollar is creating a vicious cycle which will inevitably cause our currency to depreciate more. As our dollar loses value, foreign goods purchased with dollars become more expensive. Since we are now dependent on imported goods, (see the trade deficit figures above), our shrinking dollar means higher prices for those goods.

In addition to the inflation caused by rising prices for imported wares, we have to worry about oil. The price of oil is skyrocketing even faster than the value of our dollar is falling, rising 30% in the last three months alone. As of this writing the price of oil has reached 50 dollars a barrel, and gasoline prices nationally are at a record high $2.11 at the pump.

These market forces are putting immense pressure on our economy. Higher costs for energy and transportation have been driving up prices at a 3% annual rate. Last month the Consumer Price Index jumped 0.6 %, the largest increase in four years, even when rising prices for food and energy are excluded.

While inflation is gaining momentum, recent economic reports and corporate earning statements show an economy rapidly losing steam. General Motors reported a net loss of over one billion dollars in their most recent quarter. U.S. durable goods orders plummeted by 2.8 percent in March, while new housing starts plunged 17.6 percent, marking their steepest drop in more than 14 years.

Even more telling is a report prepared by the Economic Policy Institute on April 21st. The report shows that wages and salaries as a share of national income fell to their lowest levels on record, even lower than the Great Depression of 1929. Although corporate profits are at all time highs, wages, (which represent total income for 80% of Americans), have not kept pace with inflation.

The US economy may be expanding as government statistics claim, but the majority of Americans are actually getting poorer. US household debt now stands at $10 trillion, ( a record high, of course), and has been increasing by over one trillion dollars per year since 2002. Americans cannot spend enough money to lift the economy out of the doldrums, nor can they afford higher prices, or higher interest rates.

The trembling dollar, inflation jitters, and pessimistic economic data sent all three US stock indexes to their lows for the year in April. The Dow Jones declined by 3 percent, the tech-heavy Nasdaq dropped by 4 percent, while the S&P 500 lost 2 percent. The market is waiting for the other shoe to drop, and in April the warnings became more shrill.

In testimony before Congress two weeks ago, Fed Chairman Alan Greenspan warned that “these deficits would cause the economy to stagnate or worse“.

He’s right, and he knows our economic problems are even worse than our deficits, a declining dollar, and inflation. Derivatives are financial holdings that derive their value from other securities. These new financial instruments have created a speculative bubble unlike anything ever seen, and pose a mortal danger to our economy.

In a letter to shareholders, billionaire investor Warren Buffet warned that derivatives were “time bombs, both for the parties that deal in them and the economic system“. He went on to explain how derivatives work, and why they are so dangerous:

“Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction -with your gain or loss derived from movements in the index.”

“Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties (sic) to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses -often huge in amount- in their current earnings statements without so much as a penny changing hands.”

In 1986, the global market for derivatives stood at just over one trillion dollars. By 2004, The U.S. Comptroller of the Currency estimated the value of derivatives held by U.S. commercial banks at around $84 trillion. That’s eight times the size of the US economy.

Derivatives are now one of the pillars of our financial system. Fannie Mae, a federally subsidized home-mortgage corporation, has recently admitted to $8.4 billion dollars in losses stemming from derivatives. JP Morgan Chase has $43 trillion in derivatives contracts, by far the largest portfolio of any commercial bank.

The implosion of one of our banks or lending agencies due to losses on derivatives would cause a panic, and wipe out the US economy. And the fact is, many of our financial institutions are only solvent as long as their derivative holdings are profitable. This situation is now very dangerous because 87% of derivative positions consist of interest rate contracts.

Alan Greenspan is trapped, and he knows it. The Federal Reserve must raise interest rates to improve the rate of return on dollar investments, and keep foreign investors from abandoning the US currency. But higher interest rates will slow down the already moribund US economy, and create immense losses on derivative contracts.

Monetary policy cannot save us from an impending financial reckoning caused by our soaring levels of debt and speculation. The only people who can get us out of our economic difficulties are the very people who have put us in this mess. Yet the Bush administration appears to be blithely marching the United States over the brink of an economic abyss.

After the economic crises following the Gilded Age and Roaring Twenties, there was a backlash against the excesses of capitalism. Teddy Roosevelt reined in monopolies, and passed the first income tax into law. During the Great Depression, Franklin D. Roosevelt raised taxes on the wealthy to finance his New Deal legislation.

Unfortunately, we don’t have a Roosevelt in office to champion the majority against business interests. President Bush has repeatedly cut taxes for our wealthiest citizens, and signed more free trade agreements, while our deficits have soared. He and his cronies have offered nothing but the same warmed over Reaganomics that created our trade and budget deficits in the first place.

If the US Government does not take drastic action immediately to reduce our deficits and increase investment in the US economy, one or more of the following scenarios will take place:

1) The dollar’s value will depreciate until enough investors and foreign central banks decide to unload our currency, causing a financial panic.
2) Higher interest rates will cause multi-billion dollar losses in derivatives trading, and when a financial institution admits to the scale of those losses, there will be a financial panic.
3) Too many Americans will foreclose on variable-rate mortgages and credit card debts, causing a default in a bank or lending agency, and a financial panic.
4) Fearing any of the above eventualities, US and global stock markets melt down as investors liquidate their holdings, causing a financial panic.

Either way, the house of cards that Reaganomics built will soon collapse. We have a right to be angry about the economic calamity we are about to experience, but we have no right to be surprised. This is the Third Depression after all.

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The Forgotten Deficit

A. Scott Piraino

Last year the United States posted a trade deficit of 489 billion dollars, a new record high. Our cumulative trade deficits since 1980 add up to over four trillion dollars. That’s the second largest transfer of wealth in history, second only to our national debt.

Nowhere is this transfer of wealth more apparent than in East Asia. Over the last twenty years growing trade surpluses with the US have fueled an unprecedented economic expansion. In key industries such as computers, electronics, and automobiles, the US is now dependent on Asian imports.

Even last year’s trade gap doesn’t tell the whole story. Our merchandise trade deficit totaled a whopping 549.4 billion dollars. This larger deficit was offset by surpluses in agriculture and “services”, a very broad category that includes tourism and foreign student tuition.

What happened to our country while we traded food, vacations, and college degrees for goods, and lost four trillion dollars in the process? While the Pacific Rim was booming, corporate downsizing, factory closures, and mass layoffs became an economic way of life for American workers. Per capita incomes have soared throughout the Pacific Rim, while wages in the US have stagnated.

Even the record economic expansion of the 1990’s failed to raise hourly pay for Americans. Our wages have been squeezed by the loss of millions of manufacturing jobs since 1980. Those jobs have been replaced, but with lower paying work in the service sector.

Now even those service sector jobs are leaving the United States. The evidence can be seen in the rapid growth of “outsourcing”, or transferring information jobs to foreign nations. US service industries such as finance, healthcare, and software development are rapidly expanding in lower wage nations. As this trend continues, these high-tech careers are being exported just as manufacturing jobs have fled in the past.

Despite the preponderance of evidence that we are losing a trade war, Protectionism remains out of fashion in the United States. Our political establishment refuses to connect our trade deficits with stagnating wages and a beleaguered middle class. Instead voter’s insecurities are assuaged with vague promises of prosperity in an emerging “global economy”.

Our national managers assure us that free trade will raise our standard of living. Technology and information industries will link the world into one giant market for goods and services. Expanding markets overseas will create millions of jobs for American workers.

But this begs an obvious question. Has the global economy created our trade deficits, or have our trade deficits created the global economy?

The world is wealthier than ever because the world has spent our money, four trillion dollars of it. For some parts of the world the global economy means new investment, new jobs, and rising prosperity. For Americans globalization is a kinder, gentler word for the export of jobs, factories, and technology. A small elite of investors and multinational corporations profits most from the global economy, while the American people sacrifice their incomes to create it.

So what is the true cost of our trade deficits? It’s how much wealthier we would be if the economic boom that enriched East Asia had enriched our country instead. Ultimately, it’s the difference between America today, and the America that could have been if we had spent four trillion dollars here instead of exporting it.

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Power Exchange

A. Scott Piraino

As California goes, so goes the nation. First an “energy crisis” caused rolling blackouts throughout the state, and bankrupted California’s government . Now the biggest blackout in US history has crippled the Northeastern United States, leaving Americans in the dark as to the cause.

The history of power regulation in this country can be traced to one man, Samuel Insull. He was a British born entrepreneur who became an assistant to Thomas Edison when the first power plants were being built in this country. His expertise helped pioneer the use of massive steam turbines using alternating current to create the power grid we take for granted today.

But Samuel Insull was not content to make electricity, he wanted to make money. He realized that the way to increase profits was by consolidating smaller electric companies into much larger utilities. Although he is not remembered as an inventor, Samuel Insull created an electric empire that would become the first utility holding company.

He began buying up utilities for the sole purpose of issuing stock in his newly created holding company. Soon other investors followed suit, and a new class of power barons began pyramiding holding companies one atop another, and borrowing money to purchase more utilities. As the economic boom of the 1920’s created soaring demand for electric power, speculation in utility stocks became the norm.

These companies were no longer concerned with producing electricity more efficiently, their purpose was to maximize profits for shareholders. Since all revenues ultimately came from selling electricity, consumers were forced to pay for this debt and speculation through higher prices. In 1928 the Federal Trade Commission investigated the energy trusts, uncovering evidence of price fixing, stock manipulation, and investment pyramid schemes.

But it was too late. In 1929, the greatest stock market crash in US history wiped out the power trusts. Samuel Insull’s empire collapsed as spectacularly as Enron would sixty years later.

During the Great Depression, citizen groups and politicians began calling for reform and regulation of the power companies. Franklin Delano Roosevelt fought against the utility conglomerates, going so far as to call them “evil” during his State of the Union address in 1935. That year, Congress signed the Public Utility Holding Company Act (PUHCA), into law, making the pyramidal structure of energy conglomerates illegal.

President Roosevelt was not content to rein in the power trusts, he made inexpensive, reliable electricity a cornerstone of his New Deal Legislation. The Federal Power Act of 1935 made utilities subject to federal regulations, and mandated that utilities provide electricity at “fair and reasonable” prices. Finally, FDR passed legislation that subsidized delivering electric power to rural communities.

The end result of President Roosevelt’s campaign against the utility monopolies was more electric power, delivered to more homes and businesses, at lower rates.

Samuel Insull and the first power barons can perhaps be forgiven for their mistakes and transgressions. Electric utilities had just been invented after all, and it was inevitable that unscrupulous business types would take advantage of a new source of income. Particularly since no one could know for certain what the consequences of private, unregulated power monopolies would be.

But Enron and these new “energy trading companies” have no such excuse. They know exactly what they are doing. They have de-regulated the electricity industry so it is once again legal for utilities to soak ratepayers.

Enron was founded in 1985, in Houston, Texas as a nondescript energy supply company. The company’s biggest investments were not in power plants or infrastructure, but in politicians. Enron used political connections and campaign contributions to buy deregulation.

Enron’s first dividend from their investments in the Republican Party, and the Bush family in particular, came when George Bush signed the Energy Act of 1992. This mandated that all utilities must allow power trading companies access to their grids. That same year Wendy Gramm, wife of Senator Phil Gramm, exempted Enron from regulations governing trade in energy futures.

Through corruption, Enron had created a new business of buying, selling, and trading energy, even without the infrastructure to generate power.

Enron’s biggest payoff came in the year 2000. The company was the number one contributor to the Bush campaign, and Enron founder Kenneth Lay was a longtime friend of the new President. The Bush Administration wasted no time drafting an energy policy tailored to the company’s needs, knowing that policy would conflict with the public interest.

As soon as Bush’s policy was in effect, Enron began eyeing California, the richest power market in the US, and the one most dependent on out of state power. Energy traders sent prices for electricity skyrocketing from 40 dollars to as high as 1,500 dollars a kilowatt-hour by December of 2000. As rolling blackouts plagued California, state regulators sought relief from the federal government.

Unfortunately, President Bush had appointed a free market maven in hock to Enron as chairman of the Federal Energy Regulation Commission. FERC refused to act, despite a rising public outcry and mounting evidence that the energy trading companies were soaking California. The Bush administration blamed a drought, lack of generating capacity, environmental laws, and even the internet boom for the spike in prices.

Of course these were lies, meant to deflect critics and keep media investigators from broadcasting the truth. Finally, after a year of de-regulation, FERC bowed to public pressure and enforced their mandate to ensure electric power at “fair and reasonable” rates. Price caps were established for wholesale electricity markets in June of 2001, and the “energy crisis” disappeared.

Despite their political connections, and their ability to legally extort electricity, Enron went bankrupt. Federal investigators sifting through the company’s accounts revealed a deliberate policy of manipulating energy prices in California and other western states. FERC has since sited sixty companies for price fixing the energy market during California’s crisis, but little evidence of wrongdoing has been uncovered. This price gouging was legal after all.

Electricity rates tripled for Californians during de-regulation, and Democratic Governor Gray Davis was forced to sign 43 billion dollars in energy contracts. He had no choice, because while FERC refused to regulate electricity prices, the state was at the mercy of the energy trading companies. Governor Davis has since appealed to a Federal court, trying to get California out of those energy contracts claiming they were signed under duress.

Today California is running a deficit of 38 billion dollars. Budget cuts are reducing funds for education and other social programs, while Governor Davis has been forced to raise taxes. The state is facing tough choices., not the least of which is the upcoming recall of the Governor.

The political unrest in California is a direct result of Bush’s corrupt energy policy, and the greed of energy trading companies like Enron. Still the Bush administration refuses to admit that de-regulation is flawed, instead the Republicans sit back and watch California’s economy disintegrate. And as for Governor Davis, he is a Democrat after all.

Then on August 14^th, the biggest power failure in US history paralyzed the Northeastern United States, leaving fifty million Americans without power. FirstEnergy, a Midwestern energy company, was initially blamed for the disaster. This newly formed utility conglomerate has over 12 billion dollars in debt, and a history of shirking environmental and safety laws.

FirstEnergy also has connections to the Bush administration. The company donated 700,000 thousand dollars to Republican candidates in 2002 and spent another two million dollars on lobbying, (bribing), politicians. In June the CEO of FirstEnergy hosted a fundraiser for President Bush’s re-election campaign that raised 600,000 dollars.

In return for the patronage of FirstEnergy, the Bush administration has blamed the “antiquated energy grid” for the biggest power failure in American history. Energy Secretary Spencer Abraham has been making the talk show rounds, proposing a 50 billion dollar upgrade of the nation’s energy infrastructure. And in the words of Mr. Abraham, “rate payers obviously will pay the bill because they’re the ones who benefit”.

A more likely cause for the power failure is that a transfer of too much electricity overloaded the power grid. The fact is, the US energy grid was designed to generate and distribute power locally, not trade electricity nationwide. FirstEnergy’s siphoning of electricity from other utilities created the power surge that probably started the meltdown of the power grid.

Energy Secretary Abraham has dodged questions about FirstEnergy’s energy borrowing, and whether it could have contributed to the blackout. FERC also refuses to point the finger at FirstEnergy, or implicate energy trading as the cause of the power failure. The Bush administration will never admit that de-regulation played a role in the blackout, instead they are using it as an argument for new energy legislation.

The Energy Policy Act of 2003, now being debated by Congress, seeks to undo Roosevelt’s utility regulations once and for all. Included in President Bush’s latest energy plan are more giveaways and tax cuts for the utilities and oil companies. But this act goes further, and seeks to repeal the Public Utility Holding Company Act of 1935, and the “fair and reasonable” price clause that protects consumers.

US energy policy has returned to the days of Samuel Insull, not by chance or by the operation of the free market, but through the machinations of the new energy trading companies.

The Bush administration and the new power trusts do not see electricity as an essential public service, but as an opportunity for high risk speculation and profits. De-regulation is not the reason for their energy policy, it is the excuse. And these people are not capitalists. They are crooks.

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The Nerve of the Federal Reserve

A. Scott Piraino

In 1981 the United States entered the worst economic downturn since the Great Depression. With the country mired in recession President Reagan proposed a novel solution: Cut taxes for the wealthiest Americans so they could spend and invest more money.

As if by magic, the recession of 1981 ended the following year. Not because of Reagan’s tax cuts of course, but because the Federal Reserve lowered interest rates. Paul Volcker, the Fed Chairman at that time, was determined to crush the rampant inflation of the 1970’s once and for all. His draconian solution was to send interest rates soaring to over twenty percent.

This caused the recession of 1981 and the Reagan administration knew it.

But that did not stop them from using the recession as an excuse to pass the biggest tax cut in US history. Quasi-economic terms like “supply side” and “trickle down” were used to give Reagan’s proposal an academic veneer. In fact Reaganomics was nothing more than intellectual camouflage to reduce taxes for the rich.

Although Paul Volcker coordinated the recession of 1981 with the Reagan Administration, he can perhaps be excused for jarring the US economy to a halt. He had to stifle the real, chronic, double digit inflation that plagued the country during the oil shocks of the 1970‘s.

Alan Greenspan on the other hand, has not concerned himself with real inflation, but with “wage inflation” and “employment costs”. More quasi-economic terms, but these are simply euphemisms for “pay raise”. And his battle against wage inflation has been a success.

The decade of the 1990’s saw the longest economic expansion in US history. Worker productivity increased at its fastest pace in thirty years, while inflation remained at historically low levels. Yet US workers today earn less than they did twenty years ago, after adjusting for the miniscule rate of inflation. Per capita income has climbed only because a handful of our wealthiest citizens have made obscene profits.

Throughout the tech boom of the 1990’s, Alan Greenspan’s monetary policy prevented the US economy from growing so fast that employers would have to pay higher wages.

He has lowered interest rates, but to bail out the global economy, not to ensure rising incomes for Americans. When the Asian markets collapsed in 1998, Mr. Greenspan quickly came to the rescue of global financiers by lowering interest rates. He even helped negotiate a bailout of East Asia’s economies at US taxpayer expense.

At the same time Alan Greenspan made a speech where he languidly described the plight of blue collar workers by saying, “workers should move from the steel districts of western Pennsylvania to a vibrant Silicone Valley“. He went on to call wage-challenged American workers “victims of progress”. Of course Alan Greenspan supports manufacturing, but only in low-wage nations where global corporations can make higher profits.

While Greenspan was fighting a battle against non-existent inflation, the economy has been undermined by a far more dangerous economic stimulus, speculation. Nearly seven trillion dollars in investors wealth has disappeared since the stock market meltdown began in spring of 2000. Investment banks are already reeling from the collapse of stock prices, but they are stifling worries about the biggest speculative bubble of all.

Derivatives are hedge funds, or bets based on the fluctuations of various markets. These funds avoid regulation by limiting their clientele to only the wealthiest and most sophisticated investors. Their operations and balance sheets are secret, unknown to regulators, and the rest of the financial system. Billionaire investor Warren Buffet has called derivatives “weapons of mass destruction”.

Mr. Greenspan recently expressed concern over the stability of the 142 trillion dollar derivatives market, but he cannot raise the alarm too loudly. He would incite the very panic that he fears. JP Morgan alone has 25 trillion dollars invested in derivatives, that’s a portfolio twice the size of the US economy. The implosion of one of these huge funds would set off a chain of financial failures, precipitating a monetary crisis.

Five years ago the Federal Reserve took the unprecedented step of bailing out a derivative fund to prevent its collapse. Long Term Capital Management received a 3.5 billion dollar bailout orchestrated by Mr. Greenspan. The firm had leveraged that small sum into 1.25 trillion dollars worth of derivatives.

In addition to rampant speculation, the Fed must be wary of our debt. Thanks to Reaganomics, the national debt stands at 6.5 trillion dollars. Thanks to President Bush’s tax cuts, that debt is growing again. Both our trade and budget deficits will surpass $400 billion this year, new record highs.

At this weeks meeting of the G-7 Nations, central bankers expressed concern about the soaring deficits in the United States. There is now an international consensus that the US dollar must be devalued, but Treasury Secretary John Snow is seeking to avoid the inevitable. He traveled to China last week seeking to remove that country’s artificial exchange rate, and pressured the European Community to lower interest rates, all of which would bolster the sagging dollar.

The recent instability of the dollar in world markets represents investors real fear for the stability of our economy, and our ability to finance our deficits. In the event of a financial panic, the Fed could be forced to monetize, or create the money, to pay our debts. And this brings us to the real purpose of the Federal Reserve.

The Government and people of the United States do not print their own currency, only debt. The US Treasury prints bonds, which the Federal Reserve buys for dollars. The interest we pay on those bonds is our national debt.

Not even war stops the Federal Reserve, and this process of debt creation.

After the September 11th attacks the US government enacted a 55 billion dollar emergency spending measure. At the same time Alan Greenspan ensured the stability of the banks “through an extraordinary infusion of funds”. The day after the attacks the Fed purchased 61 billion dollars worth of bonds in exchange for cash and distributed $41 billion to the banks.

While the people of the United States go further into debt to fight the War on Terror, the banks create money for free. The Federal Reserve prints currency in exchange for bonds, but other banks also expand the money supply by extending loans, in both cases creating debt. This ability to create money for free, while increasing the public debt is the insidious truth behind our private banking system.

When economists and media pundits discuss the Federal Reserve, the subject is always the Fed’s control of interest rates. By lowering interest rates, the Fed is simply giving banks incentive to create new loans, and increase economic activity. Alan Greenspan has engineered twelve interest rate cuts since the market meltdown in 2000, in an attempt to stimulate the economy.

But stimulate what? Manufacturing is now done in nations where our corporations do not have to pay American wages, (see the trade deficits above). At least the capitalists of past boom and bust cycles built factories and infrastructure in this country. Today’s oligarchs are not concerned with creating or distributing wealth, but in siphoning that wealth to themselves.

Alan Greenspan works for those oligarchs. He is more concerned with ensuring that the assets of the wealthy are not devalued by inflation, than in ensuring rising wages and income for the majority. He has endorsed more tax cuts for our wealthiest citizens and trade agreements that give corporations more power than governments.

The United States faces a financial reckoning, either by currency de-valuation, or by the Federal Reserve being forced to monetize our debt. Whatever the outcome, Alan Greenspan deserves his share of the blame. Because he knows exactly what he is doing.

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Reaganomics at War

A. Scott Piraino

In 1981, when Ronald Reagan was sworn in, the country faced the worst economic downturn since the Great Depression. President Reagan proposed a novel solution, lowering tax rates on the wealthiest Americans so they could spend and invest more money. His administration argued that only this increased economic activity could lift the country out of recession.

Quasi-economic terms like “supply side” and “trickle down” were used to give Reagan’s proposal an academic veneer. In fact Reaganomics was nothing more than intellectual camouflage for cutting tax rates on the rich. And if these tax cuts were unfair and would create the largest national debt in history, well so what.

Twenty years later our national debt has climbed to seven trillion dollars. Yearly interest payments on that debt have ballooned to 300 billion dollars. The poorest Americans have seen their living standards decline over the last twenty years, while incomes for our wealthiest citizens have soared.

But these facts did not deter President Bush. His administration used the recession of 2001 to justify a 1.35 trillion dollar tax cut package. Like Reagan, President Bush sold his plan as a tax break for all Americans, knowing these reductions would favor the wealthy.

While reducing income taxes for everyone, his administration quietly increased payroll taxes on working Americans. Social Security and Medicare are flat taxes on all wage income. That means there are no write-offs or deductions, and all payroll income is taxed at the same flat rate.

Of course the wealthiest Americans don’t worry about payroll taxes because they don’t have jobs. They own capital, invested money that makes more money. Capital gains taxes have been steadily reduced, to fifteen percent today. Since this is not payroll income, the owners of capital do not contribute to Social Security and Medicare.

Payroll taxes account for over one third of federal revenue, and nearly all the budget surpluses up to 2001. Yet President Bush did not suggest reducing these taxes, or making them fair. Instead the Bush administration continues the fiction that workers are contributing to a “trust fund”, while spending the surpluses from payroll taxes as general revenue.

This would have been just another craven transfer of wealth to the rich if not for the tragic events of September 11th. After the terrorist attacks, the recession of 2001 suddenly looked like an economic crisis. The surpluses of the previous four years disappeared, spent on military operations, emergency relief, and a bailout for the airlines.

The Bush administration announced an emergency budget increase, and a return to deficit spending. This year’s budget deficit will climb to over 400 billion by year’s end, a new record high. This does not include an additional 87 billion dollars for the war in Iraq, which President Bush requested last week.

With US forces occupying Iraq and Afghanistan, the Bush administration had the audacity to suggest another round of tax cuts for the wealthy. President Bush signed legislation last spring further reducing taxes by 350 billion dollars. Included in this new package are more tax cuts for corporations, and further reductions on capital gains taxes.

The War in Iraq is costing over four billion dollars a month, three million Americans have lost their jobs in the last three years, our trade and budget deficits are soaring, and this President doesn’t care. It’s not that he believes in Reaganomics, George Bush doesn’t believe in anything. Recession and war are not reasons for more tax cuts, they are an excuse.

In 1981 the wealthiest Americans received the biggest tax cut in US history. Make no mistake, Reaganomics has done exactly what it was supposed to do. It has made the richest Americans much wealthier, while transferring more of the tax burden to the middle class and working poor.

President Bush shares Reagan’s agenda. Our wealthiest citizens have received more tax cuts, while the rest of us pay for the war on terror, and pay down the debt created by Reaganomics. It’s a disgrace.

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