Utterances.net edited by Jalel Harchaoui.

07 January 2013

America's domestic economic performance remains far below its enormous potential
Ayn Randism vs. the Federal Reserve of Ben Bernanke
by Jalel Harchaoui.
By virtue of its Congressional mandate, the Fed sees American joblessness as “an enormous waste of human and economic potential.” The Republicans disagree.
Ayn Randism vs. the Federal Reserve of Ben Bernanke

Ben Bernanke and Paul Ryan.

As opposed to its Frankfurt analogue, America’s central bank has a dual mandate from Congress to honor. If the eurozone’s unemployment were to jump from the current 11.7% up to, say, 19%, the European Central Bank would still have no obligation to act upon that figure in terms of its monetary policy.

The Federal Reserve is different in that it is held accountable. The Fed has a duty toward the people’s elected policymakers in Congress to help the nation preserve price stability. (The Fed’s inflation target is 2.5%.) At the same time, the Fed also has as a duty to help the nation combat joblessness. (On 12-Dec-12, the Fed’s unemployment target was explicitly fixed at 6.5% vs. the current 7.8%).

ECB President Mario Draghi explained on 24-Feb-12 that Europe cannot “afford to pay everybody for not working. That’s gone.” The central banker declared the Continent’s traditional social contract obsolete. From a purely ideological perspective (not an economics one), Draghi’s insight is accurate and its clarity helpful.

The “traditional social contract” is predicated on fundamental assumptions that pose ideological problems. One assumption is that it is in the nation’s best interest to have one cohesive society, as opposed to a divided, three-layered society. Current right-wing thinkers’ response is, What’s wrong with deeply divided?

Proven job creator and current House Majority Leader Eric Cantor often expresses his patriotic concern for “the middle-class in this country, small businesses in this country, and the working families in this country”. Yet the other sectors of American society, one can notice, are never mentioned. One taboo sector is the Fortune 500. The Corporate Sector doesn’t exist. Congress is not the least bit influenced by Big Business. (Philip Morris Inc. helped fund Ryan’s formative years at think tank Empower America.)

The other group that is never brought up in proper conversation is the underclass. The latter doesn’t exist. Which leads to another problematic idea behind the “traditional social contract”. The latter assumes that after an individual has fallen out of society (work accident; family tragedy; etc.), said individual is not necessarily lost forever: they sometimes can reintegrate society and therefore warrant being invested into. That thinking is radically rejected by today’s Right Wing. If a 42-year-old housewife with a disabled child abruptly becomes a widow, why, that’s too bad.[1]

As entire fragments of the American population become destitute and turn into mere dispensable stomachs, modern society must learn to kiss them goodbye without running any risk of the economy being impacted. One just has to drive through South Central Los Angeles to be reminded that it is feasible. Those who can’t contribute to profit-making are either parked away in so that they murder each other or sent to privatized prisons funded by the middle-class; etc. In sum, the U.S. embracing the basic structure of a Third World country is a perfectly accepted trend—albeit tacitly.[2]

Interestingly, that deep-rooted ideological component becomes visible when a closer look is taken at the Right Wing’s recurrent attacks against the Fed as an institution.

On 30-Nov-10, Ryan called on Congress to rewrite the Federal Reserve Act so that the Fed abandon its maximum-employment mandate and focus solely on price stability. The Right Wing wants to dismantle the Fed as it exists. Instead, it wants the symmetric of the European Central Bank. Why is the Fortune 500 having its pawns (such as Rubio, Ryan, et al.) lash out of the Fed now?

Over the last nine months, Federal Reserve chairman Ben Bernanke has repeatedly highlighted the risk of skill atrophy. There are almost five million long-term unemployed Americans, making up 40% of today’s total unemployment. In addition, millions have given up and exited the labor pool as officially defined. Bernanke pointed out during a meeting with economists that persistent long-term employment can easily render people unemployable on a permanent basis. Among the 16-to-19-yeald-old bloc of the labor force, the rate of unemployment presently exceeds 25%. Within those segments, the chances of never obtaining the opportunity to work are serious.

The Federal Reserve is, by law, the one institution accountable to the public still attempting to combat joblessness in America. Nobody else even tries. As the last several weeks of 2012 have shown in a tangible fashion, Congress isn’t much interested in the American economy. Virtually no interest in education (no attempt to pass the modern-day equivalent of the Roosevelt’s G.I. Bill; not even discussed; regardless of how successful that measure was). Virtually no in infrastructure stimulus, actual job creation as measured by the Bureau of Labor Statistics (not the Paul Ryan kind), or putting a stop to the worsening inequalities in income, wealth and opportunities. That much has been made clear to the electorate in recent months. Even the notion itself of economic governance by Congress is absent (which makes sense given the general population’s lack of interest in the fate of society).

In stark contrast with Congress’ complacency, the politically-independent central bank has been active to the highest degree. The Fed—mainly because of the alarming unemployment figures cited above—is entering 2013 with a plan to purchase $85bn of mortgage-backed securities and Treasury securities a month. Bernanke and team are in full-on alarm mode. Their massive increase in the Fed’ balance sheet is a desperate attempt to keep interest rates artificially low so as to cause the private sector to borrow, spend and invest. All of which the private sector patently refuses to do.

House Majority Leader Eric Cantor has an explanation: “the economy is ailing,” he says. Representative Cantor is always quick to remind everyone that there is no “perpetual engine of economic prosperity in America that’s going to just continue.” In other words, these are lean and mean times. Wealth is in short supply. Everyone must tighten their belt. No participation can be expected from the rich-in-capital sectors.

In actuality, the corporate sector is awash with cash. It simply refuses deliberately to launch any new industrial projects on U.S. soil. If and when the global economy picks up again, the Fortune 500 have no real interest in creating jobs in America; labor costs and working conditions are dramatically lower abroad.

The following are some recent figures that perhaps can help appreciate how much cash is sitting idle in the hands of job creators. London-based firm Deloitte regularly surveys a representative group of U.S. chief financial officers. In the latest installment a few days ago, the group of CFOs said hiring on U.S. soil is expected to inch up by a paltry 1% on average year over year in the fourth quarter. Almost one-third of CFOs asked by Deloitte predict job cuts. That figure has never been that ominous since the survey was instituted. Simultaneously, capital-spending predictions are at survey lows.

From such depressed job figures, one can infer that earnings growth must be tepid. It is not. The fourth quarter is expected by the same CFOs to come out at 10.9% year over year in the fourth quarter. Is it owing to shortage of cash? In fact, corporate cash is at a record high. U.S. companies are sitting atop a record pile of liquidity. American non-financial corporations hold $1.74tn in cash and other liquid assets (Federal Reserve study as of 30-Sep-12). That is $44bn more than in late June 2012.

Soon, two factors will become likely to coerce the Fed into interrupting its aggressive, continuous easing campaign of the last five years. The first of course is a possible inflationary spiral that might kick in as an undesired result of the dovish program. The other one is not as present but should still be mentioned. Commentators often refer to the fact that the Fed uses fictitious money to buys securities (with the obligation of selling that debt back into the market later on). The Fed’s quantitative-easing purchases are being watched by the global marketplace as a whole, and by Northeast Asia governments in particular (Northeast Asia’s powers hold $2.9tn’s worth of U.S. government-backed securities). Said differently, as more fiat-money creation is resorted to for the purchase of government debt, the Fed does face limits. A common view among non-economists is that Washington can manufacture fictitious wealth at will. That is not true. Some supply-and-demand balance must be observed by the Treasury and the Fed in terms of dollar-strength perception and in terms of Northeast Asia willing to hold onto its existing inventories. An abrupt change in market mood could precipitate a number of dangerous spirals. The money-printing clip is unlikely to exceed the current pace, especially now that the euro crisis seems to have been postponed somewhat.

Is that what bothers the Right Wing? No it isn’t. The Right Wing is primarily opposed to the ideology behind Fed’s maximum-employment mandate. No Republican whispered a word when Bernanke announced, on 21-Sep-08, that broker-dealers Goldman Sachs and Morgan Stanley would be allowed to become, in just five days, bank holding companies so as to be able to lend their toxic assets to the Federal Reserve. Nobody on the Right said anything either when Bernanke used the Fed’s balance sheet to come to the rescue of poorly-managed AIG. Applying experimental, untested, risky and, in some instances, necessary medicine to the American economy is okay if it is for the purpose of assisting poorly-managed corporations. If it is to try to put a cap on domestic unemployment, then it is socialism.

In all likelihood, Bernanke will ignore domestic politics (as it is his job to do), but he is far from enjoying carte blanche. After two decades of price stability in the U.S., long-term inflationary risks might begin emerging. Beijing’s attitude to its U.S. Treasury inventory must be monitored, too.

~ Jalel Harchaoui.

[1] That’s what ideologues mean by ‘meritocracy’: no random event affects human life, only ‘hard work’ does. For instance, Paul Ryan’s idol Milton Friedman would have risen from poor Brooklyn background to Nobel Prize recognition without any socioeconomic programs in America. Friedman just ‘happened’ to attend a public high school. His ‘hard work’ alone would have sufficed regardless. Some private charity would have noticed him.

[2] The former chairman of Procter and Gamble, Owen Butler (1923-1998), warned of “a Third World within our own country” in June 1990. “If we [Americans] continue to let children who are born in poverty fail to get the kind of education that will allow them to participate in our economy and our society productively,” the former Fortune 500 chairman said, “then some time in the 21st century this nation will cease to be a peaceful and prosperous democracy.” Remarks such as this are heresy. A responsible leader does not acknowledge the existence of America’s underclass. The norm is to honor the taboo scrupulously.