2013: Can the USA and Canada Break Out from Economic Stagnation?

This is the time of year when mainstream economists (and a few political economists) make their annual predictions on what is in store for the upcoming year. Last year was the first time that I took the plunge, and I did much better than the mainstream economists. Last year's predictions are on my home page: 2012: The Year the Canadian Housing Bubble Will Burst.

2012 in summary:
(1) There would be very modest growth in the USA – no real recovery from the recession.
(2) Europe would fall into a double dip recession.
(3) The U.S. housing market, deflating, would finally reach a bottom.
(4) The Canadian housing market bubble would begin its deflation process.
(5) The housing market in Regina would not start to deflate due to the steady influx of population. But I added: “This would change if the oil and potash industries were to follow the general decline now evident in world commodity prices.” This happened, and house sales in Regina dipped during the last four months of the year.
Not bad, eh? Five out of five. 

What can we expect in 2013?
Here is what I believe will most likely happen:

(1) The slow recovery in the USA will continue, with the housing sector starting to make a comeback. Most of the standard economic and financial indicators are trending up. However, mainstream economists are nevertheless predicting that real economic growth will be less than 2%. This seems a reasonable assumption.

A successful ten year “grand design” between the President and the Republicans in Congress for increasing taxes and cutting the budget deficit will once again be on the political agenda in late February. Such an agreement is very unlikely and would significantly reduce the federal government’s fiscal stimulus. However, some kind of an agreement must be reached. President Obama’s proposal of additional tax increases plus a $4 billion reduction in federal spending over ten years, if approved, might well tip the country back into recession; at the very least it would reduce growth rates to less than one percent, given the general weakness in the world economy.

(2) The European Union is in a general double dip recession. Even Germany is heading that way. With governments deeply committed to austerity programs, it is highly unlikely that this will change. The political leaders in the EU are primarily focused on preventing the failure of big banks. Political unrest will continue as unemployment and underemployment continues to increase. No solutions are in sight. A collapse in Spain would be a disaster for the EU zone. Non-mainstream political parties and movements will see an increase in their public support.

(3) Japan has now been passed by China as the second largest world economy. The new government is pledging to end the long period of deflation. But how? The value of housing has steadily declined by since the peak in 1989; concerned home owners have been paying down their debt and refusing to spend.  Zero interest rates and quantitative easing have not succeeded in stimulating the economy. John Maynard Keynes called this a “liquidity trap.” Massive public spending and government debt have also failed. Economic growth rates have been only 1%, and Japan has now slipped in another recession. Chronic stagnation continues. Is this the future for mature capitalism?

(4) In Canada, the government of Stephen Harper has been able to escape the worst of the economic decline in the industrialized world. This is primarily due (in my opinion) to their relative success in maintaining the housing market bubble. But this is starting to deflate, as it must. The price of an average house in Canada is now twice that in the United States, with median household incomes about the same. This is a ridiculous situation and cannot persist. House prices must return to their long term average, between two and three times median household income. Across Canada the average price of a house is now five times median household income. This is not a good time to buy a house. In a few years the baby boomers will start downsizing and prices should continue to decline.

Sask potash mines have excess capacity, excess production and face falling prices.

(5) The Canadian economy has also benefitted from the major increase in household debt. The average household debt is now 165% of household income, even higher than in the USA just before the housing crash. If the housing market continues to decline, as projected, it is most likely that households will start to pay down their debts. This is what has happened in the United States. A decline in consumer spending, which seems to me to be most likely, would adversely impact economic growth, which is already quite weak. I cannot foresee any improvement in the rate of Canada’s economic growth in 2013.

Making Sense Out of the Current Economic Crisis

Act Up in Saskatchewan

For several months now the mainstream media, political leaders and business commentators have focused on the “Fiscal Cliff” in the United States. President Barrack Obama and the Republicans in the U.S. Congress have been at loggerheads over how to deal with the very large federal budget deficits of the past five years. Another interim agreement was reached last night, and the stock markets have responded positively.

But it is easy to discover that nothing has really changed. The U.S. politicians have bought two months of peace; by the end of February they will once again have to face the reality of the enormous budget deficit and the fact that the United States Congress has legislated an upper limit to the debt that the federal government may undertake. The debt ceiling of $16.4 trillion was reached on New Year’s eve.

How can we make sense out of this economic and financial mess? It is difficult in that mainstream economists are committed to abstract models of the free market, focus on the current situation, and ignore the patterns of history. The mass media, owned and controlled by very large corporations, reflects this free market political perspective. 

Understanding the economic crisis
We can gain some insight into the current crisis by looking at key fundamentals which are deemed important by political economists. For those of us outside mainstream economics, they provide a basis for understanding what is currently happening.

(1) The advanced industrialized capitalist centres (often called The Triad of Japan, the European Union and the United States) are in a prolonged state of economic stagnation. From the 1960s through the period 2000-12, they have all experienced a steady decline in the rate of economic growth, increasing levels of unemployment and underemployment, and financial instability. The data on this is very clear. If in doubt, look at the World Bank figures.

(2) Manufacturing has steadily declined in all three centres, with transnational corporations shifting their manufacturing to low wage countries. Profits for these corporations have increased significantly as labour costs were radically cut. They now have a “surplus” of capital with limited options for investments which would earn an acceptable return. On a world wide basis, there is excess capacity in most manufacturing sectors. 

(3) With the steady decline in manufacturing, the three centres have all seen a significant rise in the share of their gross domestic product in the Finance, Insurance and Real Estate (FIRE) sector of the ecomony. But this sector does not create the same level of employment as the manufacturing sector, nor the same general level of income for workers.

(4) Various Keynesian fiscal and monetary policies have been implemented by governments and central banks to try to offset the stagnation of the private sector of the economy. Governments have borrowed heavily in order to increase government spending, including social services. Industrial developments are subsidized. The U.S. government is now spending $700 billion per year on the military. All of the Triad have greatly increased government debt. Since 2007, central banks have heavily subsidized the private finance industry.

(5) With the collapse of the high tech bubble in 2000-1, central bankers began to panic. In the United States, the Federal Reserve, under Allan Greenspan, began pouring money into the housing market. Mortgage rules were liberalized in order to encourage renters to buy houses. It was hoped that the construction industry would replace the failed dot.com industry as the new source of economic growth. But new speculative bubbles arose in the housing and finance sectors. These began to rapidly deflate in 2007, resulting in The Great Recession. 

(6) The other major stimulus to the economy has been the expansion of personal debt. Home mortgages, home equity loans, student loans, and credit card debt have balooned since the 1980s, and more dramatically since the financial crisis of 2001. In the USA, household debt rose from 50% of GDP in 1980 to 98% in 2007.

Saskatchewan's Natural Resources and the NDP

Stephen Harper loves Chinese capitalism

This past week Stephen Harper’s government announced that they had approved the takeover of Nexen Corporation by CNOOC Ltd., a Chinese state-owned oil corporation, as well as the takeover of Progress Energy Resources Corporation by Petronas, Malaysia’s state-owned oil corporation. The details of these foreign takeovers had been well known for a long time. Brad Wall’s government had approved of the takeovers. One would have expected the Saskatchewan NDP to have worked out a position, but there has only been silence. Do any of the four candidates for the leadership of the NDP have a position on foreign ownership and control of our natural resource industries? 

The takeovers approved
Stephen Harper, while approving these two takeovers, announced that in the future state-owned corporations would be limited to minority ownership in corporations operating in the Alberta tar sands. Foreign-owned corporations dominate this sector of the Canadian eonomy. The message from the media's financial analysts was that "it is business as usual outside of the oil sands."

The federal NDP under the leadership of Thomas Mulcair opposed the takeovers. But they have taken a position no different from that of the Liberal Party. The Harper government did not hold public hearings. They are ignoring public opinion on the issue. There is no guarantee that these state-owned corporations will keep their promises. The public does not know the record of the operations of these corporations in other countries.

But the federal NDP has no general natural resource policy that is different from that of the Harper government. Peter Julian, speaking for the NDP in the House of Commons, has stated that “foreign investments are crucial for re-enforcing our economy.” Is this true of the oil and gas industry? How do they finance their new investments in Canada? Why has the NDP been unable to come up with a real alternative national energy policy? The Parkland Institute in Edmonton has produced one. In the past, public opinion polls have indicated that a high percentage of Canadians would support a policy goal of Canadian ownership and control of the oil and gas industry. Is this too radical for the NDP?
   
Saskatchewan policy on natural resources
Stephen Harper told the press last Friday:  “To be blunt, Canadians have not spent years reducing ownership of sectors of the economy by our own governments only to see them bought and controlled by foreign governments instead.” This reference would seem to include the decisions by the Grant Devine, Roy Romanow and Lorne Calvert governments to privatize the Saskatchewan Oil and Gas Corporation, the natural gas sector in the province developed by Sask Power Corporation, as well as the developments by the Allan Blakeney NDP government (1971-82) to gain some ownership and control of the potash, uranium and forestry sectors.

Nexen currently owns and operates 1322 natural gas wells in Southwest Saskatchewan. These natural gas wells were part of Sask Oil when it was a Crown Corporation and are now going back under state ownership. In 1986 majority control of Sask Oil was privatized by Grant Devine’s Conservative government. The new owners changed the name to Wascana Energy. In 1988 the Devine government sold Sask Power’s natural gas holdings in Alberta to Wascana Energy for $325 million; the market price at the time indicated that the natural gas was actually worth $984 million. Wascana Energy was then bought by Occidental Petroleum Corporation of California. Nexen was spun off in order to use it to invest in Yemen, which prohibited ownership in the oil and gas industry by U.S. corporations.

Moving to a Post-neoliberal Democracy

Is there an alternative to the neoliberal political economy model that is so dominant in all the advanced industrialized countries? There used to be an alternative – one which was committed to the expansion of democracy and the creation of a universal welfare state. This was the role of the social democratic and labour parties. In the USA this progressive element was found in the Democratic Party and in Canada in the Liberal Party.

The big change came in the 1990s, when the social democratic and liberal parties shifted to the political right. The key here was their decision to give strong support to the various free trade agreements promoted by the organizations representing big business. The treaties were designed to prevent governments from returning to the activist Keynesian policies that had been the norm from the end of World War II to 1975. We know this only too well in Canada.

With the free trade agreements came the package of neoliberal policies, often referred to as The Washington Consensus:  privatization of state assets, the deregulation of the economy and finance, the contracting out of government services, the introduction of regressive taxation systems, the cuts to social programs, and the broad attack on trade unions. Transnational corporations won the right to produce anywhere in the world, sell their products and services anywhere, repatriate their profits without any government interference, and to hide their capital in the numerous off-shore tax havens.

Latin America has been the testing ground
The struggle to create an alternative to the politics of neoliberalism in Latin America is recounted by Emir Sader in his recent  book: The New Mole: Paths of the Latin American Left. (London: Verso, 2011). Sader is Emeritus Professor of Political Science at the University of Sao Paolo and author of a well known book on Lula and the Workers Party in Brazil. As he points out, Latin America was where the neoliberal model was first applied. But it is also the region where political movements and parties are creating the first post-neoliberal political parties and governments.

Sader stresses the need for political movements and political theorists to carefully ground their analysis in concrete reality. The models that were first tried in Latin America were from outside the area, where conditions were quite different. The Communist Parties, which were very important in building the trade union movement, had a model that was based on the experience of the Soviet Union. The Maoist peasant revolution in China, supported by some elements on the left, could not be repeated in Latin America. The Trotskyst analysis did not fit a region where the large majority of the people were in the informal economy and not employed by anyone. The guerrilla strategy worked in Cuba in 1959, but in the era of large armies with virtually unlimited support from the USA, it quickly failed to be a viable alternative.

The key is understanding the fundamental characteristics of the Latin American region. It was a colonized less developed area. After independence, the local bourgeois class was based in resource extraction and large scale agribusiness production, both for export to the offshore industrial centres. Politically, these interests were based in the Liberal parties with close ties to the U.S. government and transnational corporations.

The dominant political reality for the Latin American left has for a long time been the hegemony of the United States, seen most directly in its support for ugly dictatorships. Today the unipolar world of the US domination is based on its unchallenged military power, the economic and political power of finance capital and its support system, and the control of the international mass media with its portrayal of the “North American Way of Life,”middle class affluence.

Creating a new alternative
In the 1990s there was an attempt to revive the social democratic parties in Latin America.. Sader argues that they made a comeback “as the standard-bearer of globalization,” especially in their support for free trade agreements. However, the social democrats have not had a significant political impact because they lack the class base found in the advanced industrialized countries.

The World Social Forum had its start in Latin America as defenders and promoters of local resistance movements. But this attempt at change was doomed to fail. As Sader argues, “as long as the social movements limited themselves to the social sphere, they remained on the defensive, unable to create the instruments needed to fight for political hegemony.” Only new structures of power could possibly create “the other possible world.”

The shift against the dominant neoliberal agenda began in 1998 with the election of Hugo Chavez as President in Venezuela. Most important was the defeat of the Free Trade Area of the Americas, pushed by the U.S. government and big business. Instead, Chavez and other progressive governments undertook the development of an important alternative: Latin American economic co-operation. This began with Mercosur and moved to the Alianza Bolivariana para los Pueblos de Nuestra America (ALBA), the Bank of the South, the continental gas pipeline, and the Union of South American Nations. Venezuela’s oil, shared on a socialist basis, has been important to this development.

Inequality, Democracy and Trade Unions

Over the past year or so the public finally discovered that inequality of income and wealth in Canada and the United States has been steadily increasing. The short-lived Occupy Movement had one lasting impact: they had little trouble convincing the general population that the top 1% of our societies included the people who actually make the major decisions on political and economic matters.

Given the fact that the mainstream media has been in the back pocket of the 1% for a great many years, and our political leaders have all embraced the neoliberal agenda, it is interesting to discover that a majority of citizens still feel that rising inequality is an affront to democracy and steps should be taken to correct the problem. Public opinion polls even indicate that the majority is willing to accept an increase in taxes.

For those who want to seriously look at this issue, I highly recommend reading and studying Gregg Olson’s Power and Inequality: A Comparative Introduction. Olson is a professor of sociology at the University of Manitoba and has written extensively on the welfare state.

From egalitarian democracy to hierarchy and inequality
For around 90% of our existence, human beings lived in small groups, where the prevailing culture stressed collective, egalitarian values. These democratic societies were based on the concept of intrinsic equality – the right to existence with material and cultural support simply because we are human beings and residents of a community.

This changed with the development of agriculture and sedentary living. The creation of an economic surplus permitted the development of structured inequality based on castes, slavery,  class systems, gender, race/ethnicity, age and ability. Privilege was usually inherited.

As the Chinese philosopher Mencius wrote: “Those who are ruled produce the food. Those who rule are fed.” Western political philosophers like Plato and Aristotle, so revered in North America, did their best to produce political theories to justify inequality and hierarchy and denigrate democracy.

The rise of capitalism and liberalism
With the development of industrial capitalism, beginning in the 18th century, we have the solidification of society based on hierarchical divisions of social class. In all capitalist societies we have the capitalist class at the top (among the 1%), the owners of the large productive assets. As sociologist Max Weber stressed, they are supported by a strata of the “propertyless upper class,” top managers and administrators who are very well paid. The third class is the petit bourgeoisie, small scale property owners and those professionals capable of making a living with their own skills. At the bottom is the majority who are the working class, those who do not own the means of production but are required to sell their manual and mental labour to survive.

Capitalism brought with it the political philosophy of liberalism and individualism. This new world system is based on competition among individuals and among private businesses. Classic liberalism, viewed in a Herbert Spencer/social Darwinian manner, is the survival of the fittest with the winner taking all.

While we identify liberalism with basic political rights and liberties against state oppression, the most basic right is deemed to be the right to own private property. Thus, the early liberals forming constitutions and establishing liberal democratic representative governments limited political rights to men who own property. While more recent liberal ideology has argued for “equality of opportunity,” the followers of Adam Smith have been strongly opposed to any taxation system that redistributes income and wealth from rich to poor, and this includes inheritance taxes. The reality, of course, is that human beings are who they are largely because of the accident of birth. Should a person be condemned to a short life with hardship because of a basic condition over which they had absolutely no control?

Thus the democratic movement against liberalism has historically insisted that all human beings have an equal value and communities must provide basic supports necessary for a life of well being. As Olsen points out, the equality of outcome requires “a greater sense of community, solidarity, co-operation, and self-fulfillment beyond that of only individual gratification.”

Which Road for the Saskatchewan NDP?

Act Up in Saskatchewan 
Friday, 16 November 2012

The campaign for the new leader of the Saskatchewan NDP takes off this Saturday in Regina with the first public debate among the four candidates. There are thirteen debates scheduled between November 17 and February 16, 2013. This will allow NDP members and others to see the differences between the candidates. The leadership convention is scheduled for the weekend of March 9, 2013 in Saskatoon.

As everyone knows, the provincial NDP is in dire straits at this time. Their support among voters has dropped from 275,000 in 1991 to only 127,000 in 2011. Their membership has dropped from 46,000 in 1991 to around 8,000 today. The turnout at elections has dropped from 75% of eligible voters in 1991 to only 50% in 2011. The provincial Liberal Party has all but disappeared, which means that the NDP will likely have to win close to 51% of the vote to once again form the government. They now face Brad Wall and the Saskatchewan Party whose government has had an approval rating of 70% in recent public opinion polls.

The leadership candidates
The four leadership candidates are all young white men. Trent Wotherspoon, the MLA from Regina-Rosemont, appears to have the most support at this time. However, he was a strong supporter of bringing Dwaine Lingenfelter back to lead the party in 2009, and this proved to be an absolute disaster.

Cam Broten, the MLA from Saskatoon Massey Place, supported Deb Higgins for leader in 2009. Higgins had been a cabinet minister in Lorne Calvert’s NDP government but finished last in the leadership race. Because of their status as Members of the Legislative Assembly, these two candidates are the best known among party members. But because they are closely identified with the present NDP caucus, they are seen to be less likely to lead the party in a new direction.

The third candidate is Ryan Meili, a doctor and social justice activist from Saskatoon. He contested the leadership against Dwaine Lingenfelter in 2009 and finished second with 45% of the vote. He appears to have the support of many of the traditional “left” within the provincial party.

The youngest candidate is Erin Weir, an economist who has taken leave from his job with the United Steelworkers Union and the Canadian Labour Congress in Ottawa. He also spent 2010-11 with the International Trade Union Confederation in Europe. He has some public recognition from his appearances in the television media representing the political left.

A New Football Stadium for Regina?

To: The Mayor and City Council   
October 29, 2012

RE: Memorandum of Understanding on the proposed new stadium

Dear members of the City Council:

The Memorandum of Understanding on the financing of the proposed new football stadium adopted on July 19, 2012 was not final and needs to be re-assessed by the new City Council. There are a number of important reasons to revisit the issue of whether to build a new stadium or renovate the existing Mosaic Stadium. These are as follows:

(1) Some have stated that the recent municipal election settled the issue in favour of building a new stadium. However, the citizens of Regina were not given a clear choice on the issue. The three leading and serious candidates for Mayor all supported the building of a new stadium; there was no choice for the alternative. The same problem carried over to voting in the wards. Even in ward 3, where I live, there was no candidate who openly stated that they opposed the proposal for building a new stadium. There was no referendum. The election did not resolve the issue.

(2) The previous City Council did not make a serious effort to look at the option of renovating the existing stadium. The public was kept in the dark about this option. It was often stated that a renovation would cost $150 million. This was the figure supposedly put forth by a consultant’s report done for the Saskatchewan Roughriders. But both the football club and the City Council have refused to make this report public. We have no idea how the consultant came to this conclusion.

On February 8, 2008 members of the City Council, meeting as the executive committee, received a report done by Santec Architecture on the state of Mosaic Stadium. This report was not released to the public. But it has been obtained by the Canadian Taxpayers Federation, which posted it on their web site. After a careful examination of the stadium, the technical consultants concluded that it was in pretty good shape, and with the expenditure of $3.4 million, it could be made to last at least another ten years. The report detailed the renovations that were recommended.

The Saskatchewan Roughriders are currently carrying out significant renovations to Mosaic Stadium, which is to cost them $14 million. Among other things, this will expand the seating capacity to 50,000. There is no reason why these renovations cannot be maintained with some additions, which could include new seats, more washrooms and more refreshment sites.

(3) The previous City Council asked Praxis Analytics to survey public opinion as to what they think is the single most important public issue facing Regina as a community. Their survey found that 30.4% felt that the question of the availability of affordable housing was the most important issue. Only 3.2% indicated that they thought the issue of the stadium was the most important issue. The City Council did not release the results of this public opinion survey until after the Mayor and City Council had signed the Memorandum of Understanding.

These reasons may explain why there was such a low turnout in voting in the recent municipal election, only 33% of eligible voters.