What's the purpose of an "economy"

In an October 12, 2009, article in Reuters, we are told:

The worst U.S. recession since the Great Depression has ended....

"The great recession is over," NABE [National Association for Business Economics] President-Elect Lynn Reaser said.

"The vast majority of business economists believe that the recession has ended, but that the economic recovery is likely to be more moderate than those typically experienced following steep declines."

At Dictionary.com we learn that we can describe an economy as "the management of the resources of a community, country, etc., esp. with a view to its productivity."

That is consistent with what the NABE folks think. From that article:

The NABE survey, conducted in September, predicted real GDP growth expanding at an annual pace of 2.9 percent over the second half of this year. Output for all of 2009 is expected to contract 2.5 percent and next year, rebound 2.6 percent.

On the other hand the folks at Wikipedia offer a different definition: "an economy is the ways in which people use their environment to meet their material needs."

The difference between these two descriptions is informative. One is about people meeting their material needs. The other could be about computers and robots using resources to increase something called "productivity."

This first view is what economists measure without regard to what is being produced. It could be food for people. But it could be robots that produce more robots designed to produce robots. The benefits of productivity are quantified only in the sense that electronic numbers representing value transfer between the producer and the entity receiving the product. In an obvious sense today, everything that the economists measure are really the results of computers exchanging data.

So we apparently are about to see the end of The Great Recession because "productivity" is rising, according to the data.

About that second definition, the one that says an economy is about people meeting their material needs. Unemployment is still rising and jobs are still being lost. So while productivity may very well rise, it appears it's not accomplishing much towards meeting people's material needs.

Well, that's not exactly true. It's increasing the material wealth for substantially fewer Americans than it did three years ago. And it appears it is likely to continue in that direction, an increasing productivity that benefits fewer and fewer Americans.

I suppose at some point the first definition economy could consist of millions of robots serving the needs and desires of fewer than 10,000 people. Maybe even fewer than one person.

But if productivity is rising, "economists" apparently would see the economy as "healthy."

It should make one wonder, though. Are the "economists" who are quoted in news stories and "journalists" who write those stories people, or are they simply computers regurgitating data created by other computers? It's hard to imagine a human being accepting, much less announcing, information that describes an economy as in a "jobless recovery." But apparently it's all a matter of your definition and what you think the purpose of an economy is.

We don't seem to have a common definition for "an economy." Those who think it is all about productivity apparently don't see an economy as purely a description of activity engaged in to feed, clothe, house, entertain, or transport me and mine or you and yours. Instead it is purely a description of numbers exchanged between computers.

So if 10,000 Americans out of 300,000,000 are sufficiently involved in creating those numbers and the numbers are increasing to the benefit of those 10,000 then by definition the economy is fine. If the remaining 290,000,000 die from starvation and exposure it will keep some of the remaining 10,000 busy as morticians. That will show up as increased productivity indicating that the economy is growing.

Of course, that example would be rejected as unreasonable and ludicrous. So let's look at real examples occurring in real time now in what economists and journalists are describing as a "growing" economy.

This month the Mortgage Bankers Association is holding a convention in San Diego. What are their "people" saying? According to a report:

The Mortgage Bankers Assn. said Tuesday that it expected home foreclosures in the U.S. to continue to rise before leveling off late next year. The reason: Job losses have replaced adjustable subprime loans as the main cause of defaults.

Jay Brinkmann, the group's chief economist, predicted that unemployment would rise through next summer, causing delinquencies to rise. And because of the loss of income, it will be increasingly difficult to keep troubled borrowers in their homes by modifying their loans, he said.

As a result, the foreclosure rate is expected to increase "through the latter part of next year," Brinkmann said in San Diego at the trade group's annual convention. "And even when it starts to come down, it's going to come down very slowly."

We know that more folks are going to be thrown out of their homes. No, they probably won't die. Yes, families will break up as a result. But hey, productivity is going up. In fact, some economist will soon note that the vacancy rate of apartments is getting too low, spurring construction of more apartments. So people losing their homes to foreclosure actually could be reported as an increase in productivity within a few months.

Under the economists' definition of "an economy" it's purpose is being achieved.

Let's take a look at another foreclosure situation recently reported.

More California hotels are being pushed into foreclosure as tourists and businesses alike scale back their travel plans and owners are unable to pay their mortgages.

Statewide, more than 300 hotels were in foreclosure or default on their loans as of Sept. 30 -- a nearly fivefold increase since the start of the year, according to an industry report released Tuesday.

..."I have never seen so many lenders contemplating mothballing properties," said Jim Butler, a hotel lawyer and chairman of the global hospitality group for Jeffer, Mangels, Butler & Marmaro. "It can and it will get worse for the hotel industry."

The reality of this report is found in the probable multiplier effect of these property closures.

First, as each "property" closes it means a loss of jobs - service jobs. You remember "service jobs." Those are the jobs that were created in the past several decades to replace the loss of manufacturing jobs. "Service jobs" were the jobs economists and politicians pointed to as part of our growing employment and productivity.

Second, in addition to lost jobs, as each "property" closes state and local governments will see a reduction in related tax revenue which already declined in 2008. In the immediate term, the loss in sales tax and "occupancy tax or hotel tax" revenue will be significant to many tourist and convention destination cities and counties. That will result in more job losses. But in the longer term, properties will be devalued resulting some long term loss in property tax revenue.

This situation is not limited to California and the projection that it will get worse is very clear. Smith Travel Research is the primary source of hospitality industry projects which are being reported as follows:

Occupancy is projected to slide again in 2010 by 0.6% to 55.1%, while ADR (average daily rate) is forecast to decline 3.4% to $93.16, and RevPAR (revenue per available room) is expected fall 4% to $51.29.

That's on top of the STR's projections for 2009: an increase in supply of 3% and a drop of 5.5% in demand. STR's forecast projects 2009 hotel occupancy to be down 8.4% to 55.4%, ADR to decline 9.7% to $96.43, and RevPAR to end with a 17.1% decrease to $53.43.

Lower occupancy rates and lower room rates mean it will be a buyers' market for those properties in foreclosure well into 2012, if any buyers can be found.

The point is that the loss of these jobs in the next few months are not going to be offset by recent "less bad" sales and profit reports by Intel which closed two American plants this year - its 200mm wafer facility in Hillsboro, Oregon and the D2 plant in Santa Clara, California. Not-so-bad profits at Intel are not going to materially help laid-off, newly-homeless American Intel former employees meet their "needs," though a very few other Americans will show increasing asset values on their month-to-month balance sheets.

If because of how it is defined, a nation's economy can be healthy even though the increased productivity benefits only a few citizens, then that definition, "the management of the resources of a community, country, etc., esp. with a view to its productivity," is a problem.

To this writer, the definition should read "the management of the resources of a community, country, etc., with the goal to meet the material needs of, and increase the material wealth of, all the people residing therein."

Using my definition The Great Recession in the United States appears to have only just begun. And depending on which definition guides public policy, The Great Recession in the United States may extend for more than a decade.

What's the purpose of an economy? A 2012 reminder what "a recovery" means in the lives of real people.

In October 2009 post here, a question was raised was: "What's the purpose of an economy?"

As I review headlines in the news media, it's obvious that the typical reporter covering the economy doesn't ask that question. And as I read the headlines in the news media, it's obvious that California's politicians don't ask that question.

To review, in that post I offered two different perspectives on the "purpose" of an economy. The first perspective is that of most 21st Century economists and international corporations.

It is about statistical data related to something called "productivity" measured in terms of computers recording data, data that could be about the production of food for people.

But it could be and, in the economic data we see reported, is frequently about robots that produce more robots designed to produce robots creating income for corporations retained in the bank accounts those corporations. The benefits of productivity are quantified only in the sense that electronic numbers representing value transfer between the producer and the entity receiving the product are acknowledged. In an obvious sense today, everything that the economists measure are really the results of computers exchanging data.

The other perspective is data about how well the economy is servicing the general populace as they attempt to meet their material needs. This can be found in statistics examining how well the economy is distributing among the people the resources necessary to acquire food, clothing, housing, health care, and education.

The following graph is a reminder that here in California, while The Great California Slump appears to have bottomed out, we are nowhere near a recovery if the purpose of an economy is to provide our people with income needed for food, clothing, housing, health care, and education.

It's nice that new unemployment claims are down. It's nice that the number of foreclosures is down. It's nice that as reported per capita personal income in California "grew at the fastest rate in five years during 2011" and is now only 4.75% below 2007, though we know it that income is distributed less equitably than in 2007.

Let's just not forget that we have a 1.4+ million job recovery gap and are not likely to see that number change significantly in this decade.

While The Great California Slump has bottomed out, it is not over, our economy has not recovered. As I wrote here in a previous post:

...The goal of our California grandfathers and fathers as reflected by the writings of Steinbeck and the speeches of Pat Brown were being achieved in the 30-year period from 1950-1980. In the next 30 years, 1980-2010, there has been a slow, but systematic decline in access to the middle class, culminating in the effects of The Great California Slump which I now believe will be the period from November 2007 through late-2017.

We are in the era created by Jerry Brown and his generation, not in the era created by Pat Brown and The Greatest Generation.

What do you want from the American economy?

What do you want from the American economy over the next two decades?

Last October in What's the purpose of an "economy" two contrasting definitions of an "economy" were offered:

At Dictionary.com we learn that we can describe an economy as "the management of the resources of a community, country, etc., esp. with a view to its productivity."

On the other hand the folks at Wikipedia [until the middle of December 2009] offered a different definition: "an economy is the ways in which people use their environment to meet their material needs."

The difference between these two descriptions is informative. One is about people meeting their material needs - having food, clothing, shelter, medicine, and other "stuff ." The other could be about computers and robots using material resources to increase something called "productivity." Do you ever wonder what purpose our economic growth has served?

Distribution of economic growth since WWII

Here is a chart that reflects the outcome of our economy over the last 63 years (click on the chart to see a larger version):

Chart 1

The chart graphically displays:

• Personal income adjusted for the Consumer Price Index has continued to rise;
• Investment income (dividends and interest) as a percentage share of that income has grown substantially;
• Wage and benefit income as a percentage of that income has shrunk.

Let's take a look at another chart covering the last 63 years (again, click on the chart to see a larger version):

Chart 2

This chart graphically illustrates the U.S. economic productivity growth and growth rates of personal income by source. Looking at the period from just after World War II until mid-2010, the Gross Domestic Product after adjusting for inflation and population growth grew 186%. We find that during the same period personal income grew 209%.

One cannot help but notice with concern that wage and salary income has grown only 147% and, more alarming, business proprietors' income - usually small businesses that are single proprietor or partnerships -which has grown only 33%.

Those percentages are in sharp contrast to dividend and interest income has grown 565%, nearly four times that of wage and salary income and nearly 16 times that of proprietor income, confirming what was evident in the first chart, that the post-WWII economic growth pattern benefited:

• Investor income three times the actual economic growth rate;
• Worker-income 20% less than the economic growth rate
• Small business owner income 80% less than the economic growth rate; and
• Landlord (both residential and commercial) income ...well... it appears to have been a roller-coaster ride that ends at a point 50% less than the economic growth rate.

Using this information, what can one conclude was the purpose of our economy?

It would appear that the purpose of the American economy for the past 60 years has been to improve the return on money invested in corporations and financial institutions. That necessarily has resulted in a lesser share of income from growth for labor whether that labor was done by employees or by proprietors and partners.

Again, let's take a look at another chart covering the last 63 years (click on the chart to see a bigger version):

Chart 3

From 1947 to today, for each dividend and interest dollar paid to American investors, the amount paid for labor in America dropped from about $9.50 to $4.00.

Before proceeding, two things should be made clear. This is not about "Socialism" which at its core means state ownership of the real estate, machinery, and other means of production. This is not about the recent term "Ownership Society" which is a political slogan meaning different things to different people (but for advocates has generally meant the beginning point of an argument for the reduction in income transfers from the more affluent to the poor imposed by the government).

This post is not about socialism nor the politics of poverty. It is about a long-term economic trend in income distribution from what we like to refer to as our "mixed economy."

Remember the two definitions/descriptions of an "economy" at the beginning of this post? One is about people meeting their material needs. The other could be about computers and robots using resources to increase something called "productivity."

We seem to be doing very well at implementing using resources through automation with the result being increased productivity.

How well have we done in this country if we define "material needs" at its minimum? "Needs" after all means "what is required, necessities." Relative to other developed nations, we do poorly at making certain all our people have access to what is required to maintain a life free of need, meaning a minimum standard of living. We try, but particularly now, in The Great Recession, we're plagued with more homelessness and inadequate health care and we do have more than a few children who do not get "three square meals" a day.

But when Americans talk about the economy, we use a traditional American viewpoint regarding standard of living. When we discuss our needs - "what is required" - we really mean that which is needed to maintain a "middle class" lifestyle. The problem is, nobody seems to clearly know what that is.

What is the "Economic Middle Class"

We think we know what the "economic lower class" is (keep in mind these are not pejorative terms demeaning people, but terms related to income and assets owned). The government defines "poverty level" income for a family of three (usually with one wage earner) as $18,310, though the unspoken assumption (sometimes not true) is that this family would receive in "income transfer payments" in the form of medicaid, food stamps, and a housing subsidy plus training and other assistance to make them more employable.

Then we all need to know who is in the "upper class." Probably the best definition uses the personal net assets level to define the "economic upper class." The Generation-Skipping Transfer Tax Exemption is set at $2 million, a figure which was also the Estate Tax Exemption from 2006 to 2008. If the members of a "nuclear family" have $2 million in net assets (assets less liabilities), by American government standards they are in the economic upper class.

It seems therefore that the American "economic middle class" is a vast number of people who find themselves outside what the government defines as the economic lower class (whew!) and the economic upper class (darned!).

But defining the "economic middle class" this way is very confusing as there are substantial variations in the "lifestyles" within this group of American. Is there one guideline Americans have used as an indicator of "middle-classness?" Probably having sufficient income to buy a home is an indicator of achievement to middle class. (Home ownership itself is not an indicator, just having sufficient income to buy a home if one wishes to do so is the indicator that a family has achieved the shared American dream.)

According to the California Association of Realtors, in the first quarter of 2007 the minimum household income needed to purchase an entry-level home in California was $96,910. By the third quarter of 2009 - after the housing price bubble burst leading to The Great Recession - the minimum income needed to buy an entry-level home in California was $43,500.

There seems to be a huge difference between these numbers. Do you need to earn $97,000 a year or $43,500 a year to reach achievement to middle class? The home price bubble really did a number on "middleclassness" in California and in many urban areas across the nation during the last decade. Fortunately, in much of the nation the numbers averaged half the California numbers from 1990 - 2007.

If we assume that in 2010 a wage-based income of around $45,000 a year is the indicator of arrival to middle class, then what about those with incomes between $18,310±($9/hr) and $45,000± ($22/hour). Historically this group would have been called the "working class" and "blue collar workers." Also historically, people above this level were proprietors (business owners) and professionals (attorneys, doctors, etc.), people who invested in, and owned the assets of, their businesses and were more likely to be called the middle class.

As we have seen in Chart 2 above, "proprietors" who own their businesses have become fewer and likely are seeing less personal income. In fact, during the past 60 years more of these Americans have become employees in medical groups like Kaiser or a corporate attorney or a manager of a business division of a large corporations. They don't own their business.

One confusion about the middle class here in the beginning of the 21st Century is identity. Employment including such diverse groups as academics and teachers, social workers, engineers, managers, doctors, nurses, pharmacists, and attorneys have been defined as "professional-managerial class." Barbara and John Ehrenreich formally described this group as "salaried mental workers who do not own the means of production and whose major function in the social division of labor...(is)...the reproduction of capitalist culture and capitalist class relations."

Though self-described as "middle class," those in the professional-managerial class tend to seek higher rank status and have higher incomes than average for factory, clerical and service workers. In the latter part of the 20th Century members of the professional-managerial class came to identify themselves with those in families whose income derives primarily from dividends and interest.

Thus, by the early 21st Century these mostly college-educated workers erroneously identified their interests with the interests of the economic upper class. This may have happened because in their nuclear families, through the advent of having two wage earners in the household and access to essentially unlimited debt, many of them acquired gross assets valued in excess of $1 million, though the asset value was inflated by the housing bubble, their net assets were well below that number, and their income derived mostly from work.

Dreams notwithstanding, if (a) you must earn wages or a salary to maintain your standard of living, (b) your income exceeds $20,000±, and (c) your assets minus debts total less than $2 million, you are in the working middle class whether you are a single parent family with an income of $30,000 a year living in a rental or a single child working couple with a family income of $110,000 a year living in your owned home. Today the vast majority of Americans who are working are in the middle class.

The median weekly earnings for full time employment is $740 a week or $38,480 a year or $18.50 per hour which means that most of single person or single parent American middle class families could not feel like they've achieved "middle-classness," meaning they could not buy a home if they wished to do so.

As a subgroup the median weekly earnings for full time employment for those in the professional-managerial class is $1,050 a week, $54,600 a year, or $26.25 an hour. As a subgroup, single person or single parent professional-managerial class families need only one person employed to feel like they've achieved "middle-classness" meaning they could buy a home (though not in California in during the mid-2000's where two such incomes were required).

We've explored the idea of "middle-classness." Let's return now to the economy.

Returning to business as usual

According to Treasury Secretary Timothy Geithner in an August 2nd New York Times op-ed piece the economy is returning, even if it is doing so slowly. He lists a number of things that indicate a basis for optimism to him and other financial types including:

• Exports are booming because American companies are very competitive and lead the world in many high-tech industries.

• Private job growth has returned — not as fast as we would like, but at an earlier stage of this recovery than in the last two recoveries. Manufacturing has generated 136,000 new jobs in the past six months.

• Businesses have repaired their balance sheets and are now in a strong financial position to reinvest and grow.

• The auto industry is coming back, and the Big Three — Chrysler, Ford and General Motors — are now leaner, generating profits despite lower annual sales.

The problem with this list is that it does represent a return to the economy that began with second half of the 20th Century. No one has bothered to ask the question "Is this what our economy is supposed to do?" Let's take these items one at a time and examine them from an American middle class viewpoint.

High-tech Industry Exports. As explained here last October in the post The iPad Economy we see growth in our GDP when Apple sells iPads to customers in Germany. The product is manufactured in China a shipped to Germany and Apple shareholders will make money. From that economic activity, few American workers will benefit, limited mostly to those in the "professional-managerial class"though a small number of support, clerical and janitorial folks will see continued employment.

But this technological export growth will not produce in the United States any manufacturing jobs and probably no other new jobs.

Private Job Growth. My reaction was "you've got to be kidding." According to recent statistics from the government that employs Geithner, so far during The Great Recession the U.S. lost about 7.3 million jobs while the workforce grew 0.7 million. We need 8 million jobs just to rebuild our economy where it was in November 2007. Any growth in recent months is negligible, barely keeping pace with the current growth in the workforce.

Then, particularly since he is a member of a Democratic Administration, one has to wonder under what rock Geithner has been living during recent decades that he would mention "manufacturing jobs." Since 1977 - 32 years ago - the United States has lost 7.5 million manufacturing jobs - yes, nearly 2 million of those were among the 8 million jobs lost in The Great Recession. But without a substantive change in dominant attitude among the financial gurus and those in the upper-most tier of the managerial class, we're not going to see even those 2 million manufacturing jobs come back in the next decade. This is a graph of our manufacturing employment since 1947:

Chart 4

Manufacturing jobs, really? Even if manufacturing employment in America could recover to 2007 next year, we'd still be short 6 million jobs. But where are these manufacturing jobs going to come from? Green industry? Which brings us to his next item.

New Investment Resulting from Repaired Business Balance Sheets. Which businesses? Big international corporations like GE are using the asset accumulation in the balance sheet to pay dividends to their shareholders and buy back their own stock in order to increase the stock value. We'll explore this asset use later in this post, but GE is a major manufacturer of alternative energy systems.

Large retailers? Are they planning new investment? Most retail sales depend entirely on American worker income. Costco, Home Depot, Walmart and Safeway all are ready to invest? In what? New stores???

High tech manufacturing? Yeah, a new plant opened in Taiwan to manufacture new iPads.

For a even clearer picture, let's move on to the next item.

The American Auto Industry Rebound. That the American auto industry is showing a rebound is true. Ford is the best example. Last month it reported a $2.6 billion second quarter profit, which is nearly 70% of it highest profits ever in 1999. It is doing it with half the employees it had back then.

General Motors. You remember them. The government bail-out left the taxpayers owning 60% of GM. It appears GM is going to be making a pile of money - in China. GM sells more cars in China than it does in the U.S. and produces them there. It employs 32,000 hourly workers in China and 52,000 in the United States. It employed 470,000 here in 1970.

And, if you're among the corporate professional-managerial class, such as an engineer on the electrical system in the Volt, you need to be aware that GM in China is building a $250 million advanced technology center to develop batteries and alternative energy sources (that green industry the President is suggesting might put Americans to work). Maybe we can still buy a 2021 Chevy Volt assembled here by robots, but the improved batteries in that year's model will have been developed and probably manufactured in China, by Chinese engineers and Chinese workers.

Fortunately, the American taxpayer will share in the profits if GM succeeds in China. Of course if you have been unemployed or are making half what you made in 2006, you won't share much. But those who depend on dividends and interest for income likely will see some benefit from those profits if only in the form of lower income taxes.

To repeat a previous paragraph: From 1947 to today, for each dividend and interest dollar paid to Americans, the amount paid for labor in America dropped from about $9.50 to $4.00. Is this the desired purpose of an economy?

What do we want from our economy?

What do you as an American want from the American economy? As indicated in Chart 3, at the beginning of 1952 ten dollars ($10.00) was paid to Americans in wages and benefits for each dollar of interest and dividends paid to Americans. By 2006 that number had dropped to four dollars ($4.00) where it has hovered since.

For nearly 60 years, we have rewarded capital investment with a larger share of income from economic growth than the share we rewarded labor. If the trend for American capital to invest in automation and in industrial/technological production in foreign nations continues, this shift in reward pattern will continue. If these trends continue, wages and benefits paid to Americans workers for each dollar of interest and dividends paid to American investors will drop to $1.60 by the end of the Century.

This investment pattern is not inherently bad. But do we want to see the same pattern of reward from American economic growth in the next few decades? Will that pattern depress the American retail and service economy further? Could it create a difference in classes similar to that seen in Third World countries today?

Maybe its all a perfectly acceptable pattern. But if not, the question is how to reconcile this investment pattern with a goal of maintaining both a minimum middle-class standard of living for the poorest among our population and a middle-class homeowner standard of living for most of our population.

One thing is for certain. No problem will arise in increasing the share for the American investor whose income comes wholly from interest and dividends.

Geithner in his Times piece concludes:

And as the president said last week, no one should bet against the American worker, American business and American ingenuity.

We suffered a terrible blow, but we are coming back.

What he and the rest of the financial community need to address is the fact that no one ever bet against the American worker, American business, and American ingenuity. It is simply a fact that like the auto industry, international corporations headquartered in America using typical American ingenuity are just choosing not to bet on the American worker at this time, but rather on automation and markets in other nations.

Ford is already a winner using automation, which makes a very large number of potential American auto workers not winners. GM is already a winner in China using Chinese workers and intends to be a winner there in alternative energy using Chinese workers.

The second quarter profit reports indicate that the 500 largest non-financial firms, after watching profits plummet in The Great Recession, have recovered to nearly 90% of pre-recession levels. Their managers are sitting on about a trillion dollars.

The managers know that profit growth is coming from their overseas operations where they are expanding. They know that future profit growth from U.S. operations will come from investment in automation. And they know it is in their best interest to use some of that cash to pay higher dividends and buy back shares to buttress increased share prices until that new investment in automation and in overseas operations pays off.

That's why in a July 23rd article we read:

General Electric Co., emerging from the global recession with a hoard of cash, raised its quarterly dividend by 20 percent and will resume stock buybacks sooner than it had predicted. The shares rose.

GE said in a statement it raised the per-share payout to 12 cents a quarter from 10 cents. The company extended stock repurchases through 2013 from the end of this year, and plans to begin buying shares this quarter.

Chief Executive Officer Jeffrey Immelt is scaling back some of the cash-saving steps he adopted in 2008 as the financial crisis deepened. GE said July 16 that it expects to have $25 billion in cash at the parent company level by year-end.

“We are able to restore the GE dividend at a historical payout level for 2010 earlier than previously anticipated and to extend our share buyback program because of continued strong cash generation, recovery at GE Capital, and solid underlying performance in our industrial businesses through the first half of 2010,” Immelt said in the statement.

The Friday prior to the announcement, GE shares closed at $14.55. The price of GE shares rose steadily from then on. Ten days later they closed 13% higher at $16.48.

Not that these companies won't start hiring American workers. They just won't be replacing the 2 million jobs lost in The Great Recession any time soon. Now would be a good time to examine economic growth reward patterns in order to make adjustments for the next 60 years.

Perhaps we'll need to find a way for all members of the American middle class to receive a larger share of the dividend and interest income from economic growth without having to risk their kids' college education, their own future retirement income, and their homes in the process.

Evonomics and Doughnut Economics: The GenX, Millennial and GenZ voters must shift the economic debate out of the candlelight onto device screens

For 100 years, beginning with WWI in 1916 and ending in 2016, a sequence of events assured the economic dominance of the U.S. dollar and the strength of the post-WWII U.S. economy.

Since 2017 the actions of the Trump Administration have undermined that dominance. Within the American consumer economy The Coronavirus Crisis and The Great Economic Lockdown of 2020 have further undermined the dominance of the dollar.

It also became clear last year that the the People's Bank of China and the European Central Bank are both alarmed by, and have rejected the idea that, a consortium of American-led private corporations with a digital global, super-sovereign currency will replace the dollar as the world's reserve currency.

In far less than a decade it appears Americans will see the end of the dollar as the World's reserve currency. It won't be replaced by a currency controlled by Mark Zuckerberg. It will be replaced by a sovereign digital currency probably not involving the United States, most likely multinational but possibly controlled by a single nation.

When that happens, the Extended Economic Distortion could continue American economic stagnation for a decade or more. To address this the GenX, Millennial and GenZ generations must move the economic discussion out of the era of 19 Century candlelight into the 21st Century era of device screens.


Coping with statistics and political terms

In four previous posts here the term "Extended Economic Distortion" was used to label the likely outcome of the world-wide pandemic.

The phrase is suggested instead of using the term"depression", which is not recognized within the economic statistics world, and in lieu of   "recession", which is defined within the economic statistics world.

Since this writer is not an economist, it might be said that this suggestion reflects unwarranted hubris. Perhaps. But that also is an unfortunate trait among economists.

"Extended Economic Distortion" is suggested because:

1. economists don't agree on the details of the definition of "recession" which has led to some recent confusion; plus
2. the effects of a crippling world-wide pandemic have not been experienced since modern economic statistical data, such as unemployment and GDP, began to be compiled on a regular and standardized basis after World War II.

Flaws in the understanding of the term "recession" led to these two headlines this week:

• Monday, A US recession began in February in the face of coronavirus 
• Tuesday, The NBER is wrong — the recession didn’t begin in February, it began in March

The world still has an international economy which very much involves the economy of the United States despite Trump's flailing about. Then a pandemic began in China, the world's largest nation which by some measurements had the world's largest economy. Indeed, our understanding of economics in 2020 has been very much complicated by the pandemic and Donald Trump

By late December parts of the Chinese economy were being shut down with results indicated by this Newsweek headline in April: China Economy Has Worst Quarter in 40 Years After Coronavirus Lockdowns, Leading the World Into Recession. Well, yes, it had the appearance of a "recession."

But the Monday article discussing the Friday US jobs report indicating that more people are working led one economist to state: "We could have the shortest recession in history — it seems ridiculous, but we could. This bottom is going to be uniquely deep, and we don’t know how fast we will get out of the bottom."

Regarding the Monday and Tuesday stories, the National Bureau of Economic Research (NBER), a private economic research organization, is the authority for dating US recessions. The NBER defines an economic recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." Academics, economists, policy makers, and corporations rely on the NBER for the precise dating of a recession's onset and end.

To be clear, the NBER has not declared the recession at an end. Rather individual economists are puzzling out loud to news media representatives about how to interpret the statistics.

There is a problem with those statistics as indicated in these two headlines: Surprise: The BLS Admits Another Phony Jobs Report and The May jobs report ‘misclassification error’ explained.

In the real world, not the world of politicized statistics, since February most State employment departments were handling a huge, unprecedented workload with the pressure being to get the paper processed so people could get their money. To address the paperwork problem hundreds of  new employees were hired, many if not most unfamiliar with the job. If the only error discovered is "misclassification" that will be a miracle

This week another 1.5 million unemployment claims were filed. In the real world, not the world of politicized statistics, these numbers represent Americans struggling to pay for food, clothing, shelter, health care, transportation, and communications.


What's going to happen to our dollar? It doesn't look good!

As is the case with the professionals in the biological and medical sciences communities learning about Covid-19, professional economists don't know enough about a coronavirus pandemic accompanied by a "Great Lockdown" to offer us meaningful information, particularly for interpretation.

An unprecedented event has distorted our statistical view of money, meaning it has been pulled or twisted out of shape rendering statistical results that are difficult, if not impossible, to interpret in terms of anticipating the economic future.

Unemployment numbers are not as clear an indicator of the scope of the problem as we might think. The jobless rate statistic in April with whatever errors it may contain indicated an unemployment rate of 14.7%. Unfortunately, discussion in the press compared it to the 1930's Great Depression numbers. Any such comparison is worthless.

You see, 2019 America was not 1929 America. Consider, for instance, that in 1929 America only about one-fourth of women worked, while about 80% of men worked. Most households were supported by one income.

In contrast, in 2019 more women were working than men, about 60% of households depend upon two incomes, and at least 35% of children under the age of 18 live in single parent households.

So it shouldn't be surprising that the Pew Research Center reported in mid-April (as new layoffs were/are still continuing) that 43% of all households had one or more persons who had lost a job or taken a cut in pay and that among lower income households the number rises to 52%.

Those 2020 American households will struggle with a reduction in income. How they will react doesn't require complex statistical projections. Those consumers will spend less. For how long, it is impossible to know.

This is the situation in a nation, indeed a world, in which everyone describes the economy as a "Consumer Economy",  an economy driven by consumer spending as a percent of its gross domestic product (GDP), as opposed to manufacturing and the other major components of GDP. Most economists say that in the U.S. about 70% of spending is consumer-driven.

(Like everything else in economics there are variations in definitions for GDP.  To be totally confused, one need only read the entire Wikipedia entry.)

Had the United States Government during the preceding three years not engaged in a successful effort to stall the international economic agenda, this Extended Economic Distortion might have been limited to a five-year recovery. (That assumees that the longer-term unemployment and business stresses will be felt mostly within the personal service sector, an assumption that has yet to be supported by data.)

However, with an international economic structure in disarray, "money" becomes a potentially serious problem. The Fed and Congress are trying to prop up an economy by expanding the money supply. That theoretically makes the dollar "worth" significantly less.

A measurement of "money" called M2 includes "liquid" cash and checking deposits plus savings deposits, money market securities, mutual funds, and other time deposits. We are confronted with this comparison:

1. In the ten years to February 2020, the U.S. M2 money supply increased by an annual rate of 6.3%.
2. In the six weeks to leading to April 6, the M2 money supply was increased by 7.7%, an annual compounded rate of 90.4%. 

According to economists, 18 to 24 months from now we should get inflation close to triple digits, offering the specter of pushing wheelbarrows full of money to McDonald's to buy a cheeseburger. Fortunately the economists haven't been right about the relationship of M2 to inflation in the 21st Century...yet.

The complication is the U.S. dollar has been the world's reserve currency preference  This has benefited the U.S. economy since WWII. But the fact is world reserve currencies change with the fortunes of countries.

Globalization supported the U.S.reserve currency dominance. Deglobalization would be expected to erode that dominance over a period of time. An Extended Economic Distortion may accelerate that erosion causing a material depreciation in the value of the dollar as the world begins to view the U.S. as just another country among the industrialized capitalist countries, so-called First World countries.

There is nothing stable in the 21st Century world, a world in which only 4% of the population lives in the United States. Both China and India each have over four times that population, and the European Union has a population that is over 50% larger than the U.S.

Even if Donald Trump were to lose the election this year, China, India, and the member nations of the European Union will never again trust Americans.

Almost ironically, last year Facebook CEO Mark Zuckerberg unveiled Libra, a new more convenient method of payment within international transactions. Libra is a digital token administered by a consortium of mostly technology and finance companies and backed by a basket of U.S. dollars, British pounds, euros, and Japanese yen.

In response, a top official of the People's Bank of China stated: “If Libra is accepted by everyone and becomes a widely used payment tool, then after some time, it is entirely possible that it will develop into a global, super-sovereign currency. We need to plan ahead to protect our monetary sovereignty.”

French Finance Minister Bruno Le Maire stated that France would not allow development of Libra in the European Union, as it would be a threat to the monetary sovereignty of states. He also spoke about the potential for abuse of marketing dominance and systemic financial risks.

Bank of England governor Mark Carney proposed the creation of a network of central bank digital currencies as a means of overcoming the destabilizing dominance of the U.S. Dollar on international trade. He proposed a new Synthetic Hegemonic Currency (SHC) provided by the public sector, perhaps supported a network of central bank digital currencies.

The European Central Bank has created a working group with the central banks of Canada, Japan, Sweden, Switzerland, and the United Kingdom to explore cross-border interoperability of national digital currency projects.

This April while Donald Trump struggled to maintain his image because of Covid-19, China became the first major economy to conduct a real-world test of a national digital currency, making it clear that China is years ahead of other nations in the development a central component of a digital world economy.

Like cash, China’s central bank-issued digital currency is a liability of the state. Unlike bitcoin, the digital yuan is hypercentralized, controlled by the People’s Bank of China, and integrated with China’s current banking system.

Simply, the rest of the world is not enchanted with the idea of corporations taking control of the world's currency system. And because the United States government has not moved to issue a national digital currency for cross-border use, the end of the dollar as the World's reserve currency seems likely within the period needed for a full economic recovery from the Coronavirus Crisis.


Will economic restructuring after Covid-19 create a healthy economy?

Even after the end of the time frame that included The Great Depression and WWII, a majority of the U.S voters were still beguiled by the American Dream in which freedom includes the opportunity for prosperity and success, as well as an upward social mobility for the family and children, achieved through hard work in a society with few barriers. Those voters elected a Republican majority in Congress that attempted to roll back federal economic policy to 1920's standards. That Republican reactionary conservatism immediately caused a rapid decline in the economy.

Republican reactionary conservatism took a back seat for much of the remainder of the 20th Century. But in the first 20 years of the 21st Century, it has taken control. This has occurred because of, not in spite of, the threat of the Climate Change movement to the American Dream fantasy which relies on unrestricted use of natural resources and penalty free environmental damage.

Of the remaining 80 years of the 21st Century, a radical restructuring of the World's economy, including the United States, is needed to address Climate Change and gross economic inequality. The changes needed will require over the next 10 years the abandoning most of the 18th-20th Century assumptions that permitted the creation of the post-WWII American 20th Century economy. It will require embracing a level of selflessness involving abandoning economic selfishness sufficiently to protect endangered toads.

This burden will fall on members of the GenX, Millennial and GenZ generations who will live through most of the remaining 21st Century. A period of Extended Economic Distortion would seemingly create an opportunity to create a potentially healthier and more egalitarian economic system. Whether those three generations and the one following them will have the will to achieve the necessary radical changes is unclear.

Their first problem will be to, within the next four years, kindly and firmly retire any political office-holders who are members of the Silent and the Baby Boomer generations. It is depressing that the two candidates for President in 2020 are in their 70's. It is even more depressing that the candidate most popular with the younger population was even older and was popular for advocating 19th Century socialism.

Which brings us to a hopeful movement known as Evonomics.

To get a feel for the movement, read Seven Ways to Transform 21st-Century Economics - and Economists: Economics matters enormously for the future, but its fundamental ideas are centuries out of date. Written by renegade economist Kate Raworth known for her book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, tells us:

    No one can deny it: economics matters. Its theories are the mother tongue of public policy, the rationale for multi-billion-dollar investments, and the tools used to tackle global poverty and manage our planetary home. Pity then that its fundamental ideas are centuries out of date yet still dominate decision-making for the future.
    Today’s economics students will be among the influential citizens and policymakers shaping human societies in 2050. But the economic mindset that they are being taught is rooted in the textbooks of 1950 which, in turn, are grounded in the theories of 1850. Given the challenges of the 21st century—from climate change and extreme inequalities to recurring financial crises—this is shaping up to be a disaster. We stand little chance of writing a new economic story that is fit for our times if we keep falling back on last-century’s economic storybooks.
    When I studied economics at university 25 years ago I believed it would empower me to help tackle humanity’s social and environmental challenges. But like many of today’s disillusioned students its disconnect from relevance and reality left me deeply frustrated. So I walked away from its theories and immersed myself in real-world economic challenges, from the villages of Zanzibar to the headquarters of the United Nations, and on to the campaign frontlines of Oxfam.
    In the process I realized the obvious: that you can’t walk away from economics because it frames the world we inhabit, so I decided to walk back towards it and flip it on its head. What if we started economics with humanity’s goals for the 21st century, and then asked what economic mindset would give us half a chance of achieving them?

On February 13, 2012, then a Senior Researcher for Oxfam, Raworth published a discussion paper A Safe and Just Space for Humanity: Can we live within the doughnut? which sets out a visual framework for sustainable development – shaped like a doughnut – by combining the concept of planetary boundaries with the complementary concept of social boundaries.

Doughnut Economics offers a way of visualizing world economics working to benefit humanity. Raworth's doughnut image depicts a sweet spot of human prosperity (an image that appealed to the Occupy Movement, the United Nations, eco-activists, and business leaders alike), an economics offering a radically new compass for guiding global development, government policy, and corporate strategy, and sets new standards for what economic success looks like.

In terms of economic theory, the 21st Century is well into the Industry 4.0, aka the Fourth Industrial Revolution, having moved through the Digital Revolution, aka the Third Industrial Revolution, which began in the mid-20th Century.

Industry 4.0 enbraces the combination of traditional manufacturing and industrial platforms with practices with the latest smart technology reducing the role of labor to a minimum. This primarily focuses on the use of large-scale machine to machine communication (M2M) and Internet of Things (IoT) deployments to provide increased automation, improved communication and self-monitoring, as well as smart machines that can analyse and diagnose issues without the need for human intervention.

Which brings us to the curious continuing debate over elements of capitalist versus socialism, effectively a discussion of late 18th to early 20th Century issues.

''The Father of Capitalism'' Adam Smith published his An Inquiry into the Nature and Causes of the Wealth of Nations (aka Wealth of Nations) in 1776. At that time the Industrial Revolution was just beginning. Over 70 years later, in 1848, at the beginning of what is known as the "Second Industrial Revolution", Karl Marx and Friedrich Engels published The Communist Manifesto presenting an analytical approach to the class struggle (historical and then current) and the conflicts within capitalism and the capitalist mode of production.

You could fill a sizeable library with printed paper publications related to, even extolling the theories within these 18th and 19th Century books, some written after the year 2000. You could sit and read them by candlelight. Why not? That's what folks did immediately after Wealth of Nations and The Communist Manifesto were written.

The point is members of the GenX, Millennial and GenZ generations need to move beyond the mythology of American Dream, beyond discussion of capitalism versus socialism. The discussion must shift to Evonomics and Doughnut Economics, it must move out of the candlelight era onto the screens of devices.

If they don't, by the mid-21st Century the American economy will become no more relevant than the post-Colonial British economy did by mid-20th Century.

The "tech equals jobs" myth rolls along in the halls of government but briefly not in the tech biz press

In the posts here a great deal of sarcasm has been offered regarding politicians embracing the executives of Silicon Valley and high tech generally. Finally, others with ostensibly more high tech credentials than I are beginning to observe that our "emperors" have no clothes.

Let me preface the following discussion by pointing out that Apple Inc. has been singled out in the current discussion because

1.  the numbers involved are big, really big, and 
2.  this week the President in his State of Union Address indicated that no one in the White House reads The New York Times by invoking the ghost of Steve Jobs and the other side of the Congressional Aisle stupidly jumped right in to share in the we-like-Jobs (that's a capital "J") because they definitely won't read The New York Times.

As one article in a tech journal put it:

Apple may be the poster child for manufacturing abroad, but HP also uses Foxconn heavily. Analysts estimate that Apple will be roughly 40 percent of Foxconn’s revenue in 2012. HP is about 25 percent, according to Fubon Research. No one is writing about HP though even though its supply chain report reads just like Apple’s. Every electronic you have on you right now goes through China. The data center that powers the cloud behind those devices were also made by folks stacked in tech dorms in China. The minerals in the battery were mined somewhere. Deep down do you really give a rat’s ass about the working conditions that created those relatively inexpensive devices? Of course not, you’re from a Western economy. And from what I can tell you’re still buying as much tech gear as you can.

It’s not just tech. Tech is being thrown under the bus with this debate because it’s sexier. Ever notice how everything you wear comes from somewhere else too. We go to Wal-Mart, Target or wherever and demand cheap chic. You don’t get cheap without inexpensive labor. In the fashion industry the race is on to find more sourcing outside of China. Why? Labor costs are going up. Africa is looking good at the moment. Rest assured that shirt on your back has some exploited labor behind it. In fact, everything you own comes from a supply chain that probably has multiple things you just don’t want to know about. You could swap out Apple in that New York Times story and replace it with almost any American corporate giant.

We all know "almost any American corporate giant" is...well, if you aren't in the mood to read anything but my conclusion click here.

This week David Gerwitz¹ joined the slowly growing group of those aware of the truth trying to get the message across.

Gerwitz notes:

It’s been a banner week for Apple. With Apple’s announcement of Q1 2012 results, the company is now apparently worth more than Greece.

In the same week, the President of the United States invoked the late Steve Jobs and Apple in his Congressionally-mandated State of the Union address.

Just a few hours later, in the GOP response to the President’s speech, Governor Mitch Daniels also played the Steve Jobs card, saying “The late Steve Jobs — what a fitting name he had — created more of them than all those stimulus dollars the President borrowed and blew.”

Partisanship aside, certainly Apple has created a lot of jobs over the years. But today, most of the jobs created by Apple are not American jobs, they’re sweatshop-style jobs for miserable, overworked workers in China.

Last week, before the State of the Union, The New York Times noted:

When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

...Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

...Apple has become one of the best-known, most admired and most imitated companies on earth, in part through an unrelenting mastery of global operations. Last year, it earned over $400,000 in profit per employee, more than Goldman Sachs, Exxon Mobil or Google.

However, what has vexed Mr. Obama as well as economists and policy makers is that Apple — and many of its high-technology peers — are not nearly as avid in creating American jobs as other famous companies were in their heydays.

Apple employs 43,000 people in the United States and 20,000 overseas, a small fraction of the over 400,000 American workers at General Motors in the 1950s, or the hundreds of thousands at General Electric in the 1980s. Many more people work for Apple’s contractors: an additional 700,000 people engineer, build and assemble iPads, iPhones and Apple’s other products. But almost none of them work in the United States. Instead, they work for foreign companies in Asia, Europe and elsewhere, at factories that almost all electronics designers rely upon to build their wares.

“Apple’s an example of why it’s so hard to create middle-class jobs in the U.S. now,” said Jared Bernstein, who until last year was an economic adviser to the White House.

“If it’s the pinnacle of capitalism, we should be worried.”

Before going any further, here is exactly what President Obama said in his State of the Union Address this week:

You see, an economy built to last is one where we encourage the talent and ingenuity of every person in this country. That means women should earn equal pay for equal work. (Applause.) It means we should support everyone who’s willing to work, and every risk-taker and entrepreneur who aspires to become the next Steve Jobs.

After all, innovation is what America has always been about. Most new jobs are created in start-ups and small businesses. So let’s pass an agenda that helps them succeed. Tear down regulations that prevent aspiring entrepreneurs from getting the financing to grow. (Applause.) Expand tax relief to small businesses that are raising wages and creating good jobs. Both parties agree on these ideas. So put them in a bill, and get it on my desk this year. (Applause.)

The President, who knows that the Apple Inc's don't represent any real hope for economy, nonetheless reinforced the conventional wisdom that American's tend to believe instead of facts.

We need to get some of the facts on the table. If Apple employs 43,000 people in the United States, we have to understand that at least one-third are Apple Store employees. According to a recent report:

It turns out that in 2010, Apple Store revenue was $481,000 per employee. It's at about $320,000 per employee through three quarters of 2011, according to Dediu. That projects to a dip from 2010's record numbers to $427,000 in revenue per employee for this year, though one would expect fourth quarter Apple Store sales to spike due to the holidays.

...But what about compensation for said employees? Is Apple particularly generous when it comes to its retail employees, considering the gold mine of a cash cow they're a big part of making so profitable?

The answer to that is, well, not so much. Dediu reckons that the average Apple store employee creates sales at the rate of about $278 per hour. Wages for those employees, however, range from $9 to $15 per hour for salespeople and can reach $30 per hour for Genius Bar staff.

Oh, and Apple Stores don't do commissions.

In fact, attempts are underway to unionize Apple Store employees. In an article last Summer, this was reported:

Part-time Apple store worker named Cory Moll is attempting to secure better pay and benefits for he and his coworkers by launching a campaign to form the Apple Retail Workers Union. The union would give the tens of thousands of Apple store employees around the world one singular voice for negotiating better pay, benefits, and treatment.

Moll, who makes $14 an hour in his part-time position with the company, says that his current wage just doesn't cut it in his hometown of San Francisco. For reference, the minimum wage in the city is $9.92 an hour. The intrepid union leader says that his movement is slowly gaining support from the company's notoriously loyal employees.

The time has come to acknowledge the truth stated here in October 2009 when the Gubernator was both literally and figuratively blowing smoke at a reporter for TIME:

Yes, Arnold is the embodiment of California - an aging actor whose image is everything and substance is not very deep. In the case of California's economy, we do have a problem and the promise of California I knew in 1960 is over.

The article focuses on the promise of the future seen in the past of the technology entrepreneurs and venture capitalists - the technopreneurs - without any real analysis of either the past or the future that they represent to the vast number of Californian's who work for a living.

Californian's already know that most of those nifty high-paying technology jobs created between 1985 and 2005 have gone to people making half or less located in other countries and other states. But they keep hearing that the green revolution partly funded by the Obama stimulus bill will be the source of California's magical economy engine.

No one is explaining the truth about that, of course.

The other truth that seems to have been missed by many is what was reported here in February 2011:

Don't be confused by the "economic recovery big-lie corollary." The San Francisco Bay Area and the San Jose Area include major technological centers including Silicon Valley, many established genetic research and development businesses, and many "green" technology centers. Employment, the number of jobs, in this area according to the federal government is the same today as it was in 1990....

In January 1994 the NASDAQ composite index was at 800. In July -September 2002 it several times closed at over 4,200. In September 2002 it frequently closed at under 1,200. That's the technology boom-bust pattern we have seen.

About half of the dot-com companies survived after 2004. A very few, like Amazon, eBay, and Google are significant firms. The layoffs in the private sector were in the hundreds of thousands in the corridor from San Francisco through San Jose....

Essentially, in terms of private sector job growth the decade between 1995 and 2005 was lost....

On October 7, 2009, the question raised here was What's the purpose of an "economy"?

That brings us back to the facts troubling David Gerwitz. They are relatively simple. In it's most recent quarterly statement Apple Inc. indicated it had $97.6 billion in cash. About two-thirds or $64 billion was reported being held by Apple "offshore" at the end of December. Gerwitz clearly stated his problem:

But Apple is a U.S. company. We know it is because both the President and the loyal opposition just pointed to it (or to the Dearly Departed, in any case) as a model for American business. ...I’m not an international finance expert, but the idea — the mere idea — that a company like Apple would store its big wad of loot offshore to avoid paying its fair share to America makes me ill.

His article points out that Microsoft has $42 billion overseas, as do Cisco and many others. So he and others struggle with the problem which they identify as not being an Apple Inc. problem. Well, maybe, but the story in The New York times offers an example that revolves around Apple. Some might call it anecdotal, but it carries with it the unfortunate truth of having a "world economy" involving international corporations but local labor markets:

The first time Eric Saragoza stepped into Apple’s manufacturing plant in Elk Grove, Calif., he felt as if he were entering an engineering wonderland.

It was 1995, and the facility near Sacramento employed more than 1,500 workers. It was a kaleidoscope of robotic arms, conveyor belts ferrying circuit boards and, eventually, candy-colored iMacs in various stages of assembly. Mr. Saragoza, an engineer, quickly moved up the plant’s ranks and joined an elite diagnostic team. His salary climbed to $50,000. He and his wife had three children. They bought a home with a pool.

“It felt like, finally, school was paying off,” he said. “I knew the world needed people who can build things.”

At the same time, however, the electronics industry was changing, and Apple — with products that were declining in popularity — was struggling to remake itself. One focus was improving manufacturing. A few years after Mr. Saragoza started his job, his bosses explained how the California plant stacked up against overseas factories: the cost, excluding the materials, of building a $1,500 computer in Elk Grove was $22 a machine. In Singapore, it was $6. In Taiwan, $4.85. Wages weren’t the major reason for the disparities. Rather it was costs like inventory and how long it took workers to finish a task.

“We were told we would have to do 12-hour days, and come in on Saturdays,” Mr. Saragoza said. “I had a family. I wanted to see my kids play soccer.”

Modernization has always caused some kinds of jobs to change or disappear. As the American economy transitioned from agriculture to manufacturing and then to other industries, farmers became steelworkers, and then salesmen and middle managers. These shifts have carried many economic benefits, and in general, with each progression, even unskilled workers received better wages and greater chances at upward mobility.

But in the last two decades, something more fundamental has changed, economists say. Midwage jobs started disappearing. Particularly among Americans without college degrees, today’s new jobs are disproportionately in service occupations — at restaurants or call centers, or as hospital attendants or temporary workers — that offer fewer opportunities for reaching the middle class.

Even Mr. Saragoza, with his college degree, was vulnerable to these trends. First, some of Elk Grove’s routine tasks were sent overseas. Mr. Saragoza didn’t mind. Then the robotics that made Apple a futuristic playground allowed executives to replace workers with machines. Some diagnostic engineering went to Singapore. Middle managers who oversaw the plant’s inventory were laid off because, suddenly, a few people with Internet connections were all that were needed.

Mr. Saragoza was too expensive for an unskilled position. He was also insufficiently credentialed for upper management. He was called into a small office in 2002 after a night shift, laid off and then escorted from the plant. He taught high school for a while, and then tried a return to technology. But Apple, which had helped anoint the region as “Silicon Valley North,” had by then converted much of the Elk Grove plant into an AppleCare call center, where new employees often earn $12 an hour.

There were employment prospects in Silicon Valley, but none of them panned out. “What they really want are 30-year-olds without children,” said Mr. Saragoza, who today is 48, and whose family now includes five of his own.

After a few months of looking for work, he started feeling desperate. Even teaching jobs had dried up. So he took a position with an electronics temp agency that had been hired by Apple to check returned iPhones and iPads before they were sent back to customers. Every day, Mr. Saragoza would drive to the building where he had once worked as an engineer, and for $10 an hour with no benefits, wipe thousands of glass screens and test audio ports by plugging in headphones.

As I said in October 2009, if the purpose of an economy is to make international corporations more productive and their owners and management more wealthy, then we have had a very successful tech-based economy over the past three decades.

On the other hand, if the purpose of an economy refers to the ways in which people use their environment to meet their material needs and you measure it in terms of the size and wealth of the middle class, the American economy is in a long-term decline which may or may not be reversible.

In fact, there is an irony in Apple's image history.

Everyone remembers the Apple commercial frm the 1984 SuperBowl XVIII which was an allusion to George Orwell's novel, Nineteen Eighty-Four, which described a dystopian future ruled by a televised "Big Brother". The rows of marching minions have direct cinematic parallels with those in the opening scenes of the classic dystopian film Metropolis.

Right now if you search on Google News the words "Apple Foxconn workers" you will be led to stories about Foxconn International Holdings Ltd., the Chinese manufacturer used by Apple to produce most of its top selling products. After publishing two frontpage stories How U.S. Lost Out on iPhone Work and In China, the Human Costs That Are Built Into an iPad one writer of a letter to the editor commented:

It’s ironic and disheartening that the company that set out to change the world could accomplish the task only by employing vendors who subject workers to slave-labor wages and an Orwellian work environment.

With all due respect to the late, great Steve Jobs, if the famous 1984 Super Bowl commercial for Apple were reshot, the image of Big Brother on the giant screen might fittingly be his own.

In stark contrast to its counterculture origins, Apple seems to have evolved into the embodiment of everything it once despised — a greedy, callous, ruthless behemoth beholden only to fund managers who demand incremental profits every quarter at any cost.

Yes, it isn't only Apple Inc. But Apple Inc. is the right image for a simple message.

That message is there is no future for workers in the "Silicon Valley tech industry international economic model implemented after 1984". It is worker antagonistic which makes it an anathema, destructive to our way of life and the well-being of working people everywhere.

Yes, it is the logical outcome of a chain of events. So was World War II. No one in their right mind would embrace either as good for humanity. But it appears that our  business leaders have and our governmental leaders had better look out.

As Peter Heather put it²:

Any new flow of wealth – such as that generated by the Industrial Revolution, in more modern times, or globalization – will always spark off intense competition for its control; and, if the amount of new wealth is large enough, those who control it will erect entirely new authority structures. In Western Europe, for instance, the Industrial Revolution eventually destroyed the social and political dominance of the landowning class....

Oh wait, President Obama and California Governor Jerry Brown make regular trips to pay homage to the gurus of the tech industry. So maybe the tech industry leaders have already destroyed the social and political dominance of the alliance between the old industrial manufacturers and labor, advancing all of us to a new era of capital versus labor. And the power has all shifted to capital.

---

¹Gerwitz is a member of FBI InfraGard, the Cyberwarfare Advisor for the International Association for Counterterrorism & Security Professionals, a columnist for The Journal of Counterterrorism and Homeland Security, and has been a regular CNN contributor, and a guest commentator for the Nieman Watchdog of the Nieman Foundation for Journalism at Harvard University. He is the author of Where Have All the Emails Gone?, the definitive study of email in the White House, as well as How To Save Jobs and The Flexible Enterprise, the classic book that served as a foundation for today's agile business movement. Gerwitz is host of the ZDNet Government and ZDNet DIY-IT blogs, CBS Interactive's Distinguished Lecturer, an author, U.S. policy advisor, and computer scientist. He is featured in The History Channel special The President's Book of Secrets, is one of America's foremost cyber-security experts, and is a top expert on saving and creating jobs. He is also director of the U.S. Strategic Perspective Institute as well as the founder of ZATZ Publishing.

² From The Fall of the Roman Empire : A New History of Rome and the Barbarians by Peter Heather

About Money

It is important that everyone understand what "money" is. By "everyone" I mean not only the poor and the middle classes, I also mean the wealthy and particularly the new "global elite" described by Chrystia Freeland in her Atlantic Monthly cover story  The Rise of the New Global Elite.

What is "money" really? It's easiest to begin the discussion by relating to the American dollar.

The United States Government creates from scratch one, and only one, commodity - money. And only the government can support its value because it has no intrinsic value. It's value is only psychological - you have to "believe in" its value. If enough people believe in it, mostly because they reliably can trade it for goods and services, then it has value.

You can get some of that commodity by working. Or you can "plant" some of it and it will "grow" more. If you have some, you can trade it for food or an iPhone. It is the "stuff" of a national government.

Like most commodities - like grain or oil - if the government creates too much of its commodity, it will take more of that commodity to trade for food or an iPhone because there is so much money to be had and relatively few iPhones. If the government commodity becomes scarce, the same amount will get you more food or an iPhone can be purchased for less money. Of course, if the commodity is scarce, it becomes harder to get. If you store enough of the commodity, you can use it to acquire power and influence in the government.

Money and Morality

While money may be the root of all evil, it is the bedrock of an economy. At no other time in human history has the concept of money been so important. And, as with so many subjects, most Americans do not understand how this came to be nor what money is. In fact, many Americans give mystical associations to money.

As a worldly philosopher, Jesus had no illusions about the relationship between "belief" and money. In Luke 16:13 (translated into modern American English) Jesus stated clearly: “No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. You cannot serve both God and money.”¹

You may remember another passage that begins "render unto Caesar...." We sometimes get confused by this. "Caesar" is an imperial title meaning the head of the Roman State. So in explaining about money and taxes, Jesus said "Give the Emperor what belongs to him and give God what belongs to God."

Taken together, in dealing with money created by the government and symbolizing wealth, Jesus imparted this wisdom: "You cannot serve both God and money. Give the government what belongs to it and give God what belongs to God."

Jesus believed so strongly in the importance of putting money in its place that he drove from house of worship those who changed the standard Greek and Roman money for Jewish and Tyrian money as he believed monetary activities defiled his religion.

Americans are so confused about this that we even print "In God We Trust" on American money, a practice that began in the middle of the Civil War (embracing on our money the idea that Jesus/God would cheer on Christian soldiers slaughtering other Christian soldiers on behalf of the state). In fact, we even print it over the home of the equivalent of our emperor apparently endowing money with religious political associations:

Fiat Money

The point about money is that:

• Money is a creation of government in order to facilitate an economy and the creation of wealth.
• The government is the sole arbiter of the worth of money.
•  The government that has the inherent right to regulate the use, acquisition, and storage of money.
• The government has the inherent right to require that people "render" some or all of that money back.

If you are sputtering in outrage at this point, that is because you don't have any idea what money is.

As explained in Wikipedia all contemporary money systems are based on "fiat money." "Fiat" is not about an Italian car. A "fiat" is an arbitrary decree or pronouncement by an absolute authority with the power to enforce it, for instance "The king ruled by fiat."

"Fiat money" is without intrinsic value as a physical commodity, and derives its value by being declared by a government to be legal tender. It must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private". Of course, you have to believe in the efficacy of a government in order to believe in the continuing value of "fiat money." But it gets more complicated.

It's easy to understand that the money supply of a country consists of government issued currency (paper money and coins). More confusing is that the quantity of currency is supplemented by demand deposits or 'bank money' (the balance held in checking accounts and savings accounts). These demand deposits usually account for a much larger part of the money supply than currency.

Bank money is intangible and exists only in the form of various bank records. It can only be effective as part of the money supply if the government assures that it is the same as "fiat money" and, in more recent times, guarantees it's existence. The need to guarantee demand deposits came into being because previously they were only backed mostly by bank customers promising to repay loans. When people couldn't repay the loans, demand deposits became worthless an the money supply shrunk.

It gets even more complicated when you realize that after World War II, the value of most "fiat money" in countries around the world became dependent upon the value of American "fiat money." But in more recent times the value of all "fiat money" can affect the value of American "fiat money."

Simply, the issues around money and money supply are so complex that the world's economy depends upon what's happening in the American economy plus what's happening to the economy in small nations such as Greece or Ireland.

In terms of our money, we Americans need to be able to trust Irish and Greek "Caesars" more than we need to trust God.  But we need to control our "bankers" through our government and quit associating bankers with some higher power - we need to throw them out of our mental "temples."

Finally, we need to quit associating the acquisition of money with good and taxes with evil. As Jesus noted, money (and wealth) does not deserve respect and is entirely the realm of government. If you don't understand that, the "Devil" has taken control of your mind.

Emotions, Ideology, and Money

More than any other people on Earth, including those who lived in past centuries, American's imbue money with emotional content. American's believe - all evidence to the contrary - that there is a potential for "fairness" and "equality" associated with money. American's believe that the definition of "freedom" includes a promise of the possibility of prosperity and success, the latter referring to wealth accumulation measured in dollars.

While our Declaration of Independence proclaims that "all men are created equal" and that they are "endowed by their Creator with certain inalienable Rights" including "Life, Liberty and the pursuit of Happiness," we have subconsciously confused the idea that "the pursuit of happiness" with the pursuit of wealth through hard work and that hard work is so associated with "good" that it will bring just rewards. We even have a term, "Protestant work ethic." The term was coined by Max Weber, a German sociologist and political economist who lived in the late 1800's and early 1900's.

It isn't surprising that the term was coined in Germany during that period. It is a term of bigotry that has nothing to do with religion other than considering oneself a "better Christian" than those other Christians, as explained in Wikipedia:

It is based upon the notion that the Calvinist emphasis on the necessity for hard work as a component of a person's calling and worldly success and as a sign of personal salvation.

It is argued that Protestants beginning with Martin Luther had reconceptualised worldly work as a duty which benefits both the individual and society as a whole. Thus, the Catholic idea of good works was transformed into an obligation to work diligently as a sign of grace. Whereas Catholicism teaches that good works are required of Catholics to be saved (viewing salvation as a future event), the Reformers taught that good works were only a consequence of an already-received salvation.

However, the Calvinist and Lutheran theologians taught that only those who were predestined to be saved would be saved, by grace alone through faith in Jesus alone. Since it was impossible to know if one was predestined (since one might not receive the "grace of perseverance," and one's conversion might be only lip-service), the notion developed that it might be possible to discern that a person was elect (predestined) by observing their way of life. Hard work and frugality were thought to be two important consequences of being one of the elect; thus, protestants were attracted to these qualities, seeking to be obedient to God to whom they owed their salvation.

This concept - worldly success as a sign of having received "the grace of perseverance" because one is among God's chosen - led to a more insidious conventional wisdom among Americans. Again, from Wikipedia:

Horatio Alger, Jr. (13 January 1832 - 18 July 1899). Alger wrote over 100 books for young working class males, beginning with Ragged Dick, which was published in 1867. His books have been described as rags to riches stories. “By leading exemplary lives, struggling valiantly against poverty and adversity,” Alger’s protagonists gain both wealth and honor, ultimately realizing the American Dream.

Among the many things that came out of the Victorian Era (1837-1901) was an American population tending to embrace "the Horatio Alger story" buttressed by what they learned was "the Protestant Ethic" which established a sense of values around wealth - that wealth is earned, if you have money you are entitled to it, and accumulating money has nothing to do with the government.

In the 21st Century, we find that we have successfully proselytized this fallacious construct around the world as if it were a basis for a religion. That religion, well really a political ideology, is "American Capitalism."

And thus we have some peculiar events. Stephen Schwarzman, billionaire chairman and cofounder of the Blackstone Group, one of the world’s largest private-equity firms, didn't like the Obama administration's proposal to raise taxes on private-equity-firm compensation—by treating “carried interest” as ordinary income. So sure was Schwarzman of his moral right to that compensation for his hard work that, in July 2010 in a board meeting of a non-profit organization, he said of the proposal: "It’s a war. It’s like when Hitler invaded Poland in 1939.”

Yes, Schwarzman apologized. But this is weird for so many reasons. Schwarzman, 63, is in finance, he's not dumb, he's a Yale and Harvard Business School graduate. He's Jewish. What it indicates to me is that he's so vested in the core values of the political ideology of "American Capitalism" he doesn't even know the truths about fiat money, that:

• Money is a creation of government in order to facilitate an economy and the creation of wealth.
• The government is the sole arbiter of the worth of money.
•  The government that has the inherent right to regulate the use, acquisition, and storage of money.
• The government has the inherent right to require that people "render" some or all of that money back.

Instead, like so many of his billionaire peers who did not inherit their wealth (as well as those who did inherit their wealth), Schwarzman doesn't keep in mind that though he acquired his wealth with hard work (and some favorable circumstances), he did so using money - he depended entirely on the good faith and credit of the United States government and its citizens.

And underlying this is the fact that the American money system became what it is today because many, many ordinary American's worked very hard over two centuries taking advantage of the fact that there were seemingly unlimited natural resources available to them.

As Chrystia Freeland notes in her article:

...The rage in the C-suites is driven not merely by greed but by a perceived affront to the plutocrats’ amour propre, a wounded incredulity that anyone could think of them as villains rather than heroes. Aren’t they, after all, the ones whose financial and technological innovations represent the future of the American economy? Aren’t they “doing God’s work”?

This is worrisome thinking, because when those who spearhead fundamental economic change embrace self-serving ideology in an attempt to alter the exercise of governmental power, historically political turmoil has resulted frequently with bad results for humankind.

It is worrisome when many Americans, both rich and poor, see equality in inequality, possession of wealth as an ideological right, and any government effort to be the balancing force against obvious, self-evident concentrated economic power as a move towards "tyranny."

In the end, possession of most of the money can mean possession of all the power in society. Ironically, the truth is that a commodity created by government transferred into the hands of a few because of government action or government inaction can give those few control of the government. There is nothing democratic or "American" about that.

American's need to remember that:

• Money is a creation of government in order to facilitate an economy and the creation of wealth.
• The government is the sole arbiter of the worth of money.
•  The government that has the inherent right to regulate the use, acquisition, and storage of money.
• The government has the inherent right to require that people "render" some or all of that money back.

In other words, without that government created and supported commodity there would be no modern economy and you and members of the new global elite would be paid for your work in chickens. How many chickens is an iPhone worth?

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¹English speakers frequently relate to "You cannot serve God and mammon." Some people even capitalize "mammon" thinking it was some Greek god.  Jesus spoke Aramaic and "mammon" derives from Late Latin 'mammon', from Greek 'μαμμωνάς', Syriac 'mámóna' (riches), and was an Aramaic loan word in Hebrew meaning wealth although it may also have meant 'that in which one trusts'.