Wayne O’Leary

Economic Myths

There are certain economic myths of an enduring nature that Americans have been persuaded to accept. We live by them and base government policy on them despite their lack of any basis in reality. It matters little if Democrats or Republicans are in charge of Washington; both parties are in thrall to the prevailing mythologies.

The first is the supposed critical importance of balanced budgets and deficit reduction. These bromides have been Republican dogma from time immemorial, although under George W. Bush, they have temporarily become dead letters. None other than Dick Cheney is on record as saying they don’t matter, and as if to reinforce that statement, the Republican administration has delivered six years of unbalanced budgets and deep deficits, brought about by rising defense spending combined with tax cuts.

Ironically, it is the Democrats who, since the Clinton years, have evolved into the party of budget balance and deficit reduction. For the GOP’s big-government conservatives, extreme fiscal discipline has become mostly an object of lip service; for the limited-government liberals of the post-Clinton Democracy, it has become an article of faith. This is an inheritance of the Clinton-Greenspan pact of 1992, in which a Democratic president-elect and a Republican Federal Reserve chairman agreed to tie the loosening of restrictive monetary policy to limits on government spending and elimination of the federal deficit.

The Clinton-Greenspan rapprochement, in turn, created the era of Rubinomics, named for Clinton’s Treasury Secretary Robert Rubin, who established the tight fiscal regime of the 1990s and made balanced budgets and deficit reduction Democratic doctrine, before departing for the chairmanship of financial-services monolith Citigroup. Rubin, founder of the fiscally conservative Hamilton Project, remains the party’s chief economic guru, and his influence is seen in the latter-day Democratic fondness for such concepts as “pay-go” (pay as you go) budget procedures. Sadly, the price exacted for endorsing the Rubin approach is a future inability to address big problems (health care, climate change) in a big way, because deficit reduction has become the consensus be-all and end-all Democratic policy.

Now comes some interesting economic news from, of all places, Australia. The Australian economy, which has been perking along in an expansion mode for 16 years, has an annual growth rate (3.6%) in excess of most developed countries. The land Down Under has been doing this, contrarily, while running a fiscal deficit. More than that, it’s been in deficit for all but one of the last 50 years. As a result, Australian economists have ceased to worry about reducing or eliminating the decades-old shortfall, concluding that deficits are not all that important.

Some respected American economists agree. James K. Galbraith, of the University of Texas, argues that moderate (the key word) deficits don’t harm the economy and don’t raise interest rates, a claim made by the Rubin school. Proposed draconian solutions to a non-problem, such as drastically cutting entitlements, are unnecessary in his view. Exercising budget restraint and reducing the deficit somewhat is one thing; placing the government in a fiscal strait jacket is something else. As the Australian experience shows, Democrats don’t need the elixir the Hamilton Project is peddling; they don’t have to drink Bob Rubin’s Wall Street Kool-Aid.
But there’s something else emanating from Wall Street besides revived Rubinomics; it sounds like a muffled roar. The stock market is up! Yahoo, the stock market is up! Over 13,000 on the Dow and counting. The conventional wisdom says we should all join in the cheering, but what’s taking place is just an expression of the second economic myth of our time.

In truth, the rising market is a meaningless phenomenon for most Americans and, counterintuitive as it may seem, actually a bad thing in many ways. Here’s why: There is a clear disconnection between the good news on Wall Street, fueled by record profits, and what amounts to bad economic news everywhere else. While the market has been surging, the rest of the economy, the real economy, has been sinking. We have a housing crisis, a huge trade deficit, record gasoline prices, stagnant wages, high household debt, a negative savings level, a healthcare emergency, and a GDP (gross domestic product) that rose by only 1.3% between January and March, the worst quarterly performance in four years.

In a rational economy, the constant drumbeat of bad domestic news would drag down the stock market, yet it doesn’t. The reason is that the premier companies listed on the New York Stock Exchange (including all 30 of those making up the Dow Jones industrial average) are no longer American companies operating in an American economy, but global companies operating in a global economy. Their allegiances are international, not national. What happens at home, where their corporate headquarters are located, is becoming irrelevant to the overall businesses of America’s conglomerates. They increasingly make their money (over half of it in some cases) overseas; use their offshore status to avoid US taxes; and employ their foreign operations to cripple domestic competition, depress domestic wages, and negate domestic labor unrest. Most of all, they utilize their global reach to outsource their manpower needs to the world’s cheapest labor markets, which artificially inflates their productivity and stock values.

In other words, America’s publicly traded multinationals do well in inverse proportion to the welfare of their home economy, and Wall Street loves it. One of the Dow 30, IBM, is considered by the International Association of Outsourcing Professionals — yes, there is such an organization — to be the world’s pacesetter in global outsourcing; two-thirds of the jobs it has created in recent years have been overseas. Another member of the Dow, WalMart, imports 70% of its retail products from China, where they are manufactured by other expatriate American firms employing cheap local labor. A third, pharmaceutical giant Pfizer, produces its leading drugs in Ireland to avoid US corporate income taxes. A fourth, tractor maker Caterpillar, has used its offshore manufacturing capacity to break strikes at its stateside factories. You get the picture.

So the next time media business analysts and others hail the rising stock market, take it all with a grain of salt. Remember that for Wall Street to do well, everyone else has to do poorly. The starry-eyed market worshippers, after all, are captives of mythology. They’ve imbibed the Kool-Aid.

Wayne O’Leary is a writer in Orono, Maine.

From The Progressive Populist, July 1-15, 2007

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