Keynesianism. Borrowing For Growth. US Wartime Experience.

The Great Depression (1929-39) was the deepest and longest-lasting economic downturn in the history of the Western industrialized world. In the United States, the Great Depression began soon after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing steep declines in industrial output and rising levels of unemployment as failing companies laid off workers. By 1933, when the Great Depression reached its nadir, some 13 to 15 million Americans were unemployed and nearly half of the country’s banks had failed. Though the relief and reform measures put into place by President Franklin D Roosevelt helped lessen the worst effects of the Great Depression in the 1930s, the economy would not fully turn around until after 1939, when World War II kicked American industry into high gear.

History: The Great Depression

After a decade of depression, the great economic innovation in the wartime USA was the creation of an immense flow of credit to support the construction of industrial plant and equipment for the war effort. The US government willed the ends—of vast steel factories, great new production facilities for ships, aircraft, and armaments—and willed the means, by authorising the Federal Reserve Bank to create credit for business expansion. This is the secret of rapid economic development. Allowing banks and the government to create credit allied with businesses borrowing to invest that money, then the economy will prosper.

The public debt and investment credit created to fund these vast programs was rewarded by immense productivity gains made by American industry. From 1938 to 1944, economic growth increasing on average by over 12 percent pa, industrial production booming at over 20 percent pa, productivity per head up by 8.5 percent pa, industrial construction climbing at70 percent pa. USA productivity was up 64 percent per capita. The output of the economy increased in constant $2005 prices from a trillion dollars in 1938 to about two trillion dollars in 1944 (http://en.wikipedia.org/wiki/File:US_GDP_10-60.jpg). The USA of 1946 had over 50 percent of the production capacity of the market economies of the world.

But the doctrinaire capitalist US Government regarded economic planning as an unfortunate, neo-socialist wartime necessity. After the war, under President Harry Truman, it abandoned the Investment Credit Creation procedures which had won the war, and all forms of industrial development policy. Consequently, the American economy declined to the modest growth rate of two to three percent pa. First Japan, then China learnt the lessons. Deng Xiao-Ping's China was not scaared of socialism and introduced Investment Credit Creation from the mid-1970s. That is why China has grown so dramatically in recent years. It also points the way for the western world battered by austerity. Socialism is the answer, even if it is limited to war socialism.

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China’s Competitive Advantages Grow While the US Borrows War Bucks!

Writing in the current issue of the International Journal of Sustainable Strategic Management, Jack McCann of Lincoln Memorial University, in Tennessee, says that China has witnessed an average annual growth of about 10% for nearly two decades and has been uniquely stable in the present world economic crises. Indeed, China’s merchandise trade has been growing three times faster than world trade at about 14%. China currently produces nearly two thirds of the world’s bicycles, a third of its television sets and air conditioners, and half of the world’s microwave ovens. China has become the world’s second largest oil consumer after the US. McCann says:

On paper, globalization poses the long term potential to raise living standards and reduce the costs of goods and services for people everywhere. … China’s pool of cheap labor may dominate world labor markets for decades, giving it a monopoly on cheaply manufactured goods

Globalization has wrought new opportunities for many nations. China is no different from how the US was, and how any other nation is in attempting to make the most of its advantages, cultivating friendships with third party countries. Meanwhile shamelessly greedy US politicians try to support enormous war spending without frightening the rich with taxation! Instead the US trade deficit with China increases year after year into the hundreds of billions of dollars. What will happen if the Chinese decide to release the dollars they hold on to the market? The dollar will be devalued and the US bankrupted.

So tax the rich to pay US workers for what they do best—make excellent products that the world wants to buy. Rebuild our decaying cities and infrastructure. Use our technical knowledge to improve labor productivity at home, instead of outsourcing abroad! Compete!

US Credit Worthiness, Tax Hikes and the Balancing of the Federal Budget

Krishna Tummala, director of Kansas State’s public administration program and professor of political science simply explains the reason for the nation’s burgeoning debt:

People demand more services but are not always willing to pay taxes. The politicians promise more services without telling them the cost and that they must be paid for. Instead, they use the so-called painless way to go about this by allowing deficit budgets. This means not only the politicians must educate themselves on the issues, but their constituents as well.

He adds that the argument that the federal government should live like we do, within our means, is hypocritical. The personal debt of Americans is close to $2 trillion, so effectively we all live in debt. The federal government just is behaving like we do. Moreover, it has the responsibility for the common welfare and general defense, as the Constitution requires. Yet state governments, 48 of which require a balanced budget by law, are favorably compared to the federal government. But state governments differ in their budgeting compared to the fed. The federal government has only one budget, but each state has two, a current account and a capital account. Only the state’s current account—effectively its day to day running costs—must be balanced. The capital account is the place for major project expenditures, and they have to be carried forward annually.

The federal government borrows money through Article I of the US Constitution, and had it not been able to, it could not have borrowed $15 million from Britain in 1803 to complete the Louisiana Purchase. It doubled the size of the country, made it possible for it to be united coast to coast, and without it, it perhaps would never have become the world power it is. Now the national debt is $14 trillion, but it is not owed to the British. The Chinese have around $3 trillion of it.

People who want a balanced budget, many of them Republicans, have to realize that it will need taxes to be raised. Cutting expenditures will not be enough, and will shut down the country first. But Republicans will not condone tax hikes because the people with the money are leading Republican donors. So, cooperation between the parties has been lacking, only quarreling, a lot of posturing and little dialogue. The deadline for increasing the debt ceiling is 2 August, with the country’s credit worthiness at stake. If the debt ceiling is not extended, the country will default, hitting the economy of the whole world, everything now being so interconnected.

The country’s credit worthiness underpins the financing of debts. Foreign countries must have confidence in the US economy or they will not be willing to lend. Of course, credit ratings agencies such as Moody’s and Standard & Poor’s can evaluate the soundness of the US economy but the ratings agencies were giving excellent ratings to the financial sector “before it went belly-up”, Tummala wryly concluded!

How the Bankers’ Greed is Ruining the US Internationally

The United States has slipped from second place to 13th out of 34 countries in the number of students enrolled in university, and it is stagnating in science teaching—in 17th place—and doing poorly in math, in 25th place. In contrast, more Chinese are enrolling in universities, which means there will be more scientists in China than there are in the US, driving up Chinese scientific output, said Penn State professor Caroline Wagner at the annual meeting of the American Association for the Advancement of Science (AAAS).

At a time when the greed of bankers has forced United States and Europe to make severe cuts in government spending on social services, but also on support for industry and science, China has significantly increased spending on science and technology, said Denis Simon—a professor at Penn State University who is also the science and technology adviser to the mayor of the Chinese city of Dalian—at the AAAS meeting. Simon said that the Chinese hope to spend around 2.5 percent of gross domestic product (GDP), the sum of a nation’s annual output, on research and development by 2020.

In the United States, Republican lawmakers are talking about trimming a billion dollars from the National Institutes of Health (NIH), the world’s largest public research institute, and slashing funds for other science and research agencies, negating the billion dollar boost President Barack Obama proposed for science and health research in his 2012 budget. Republicans want to make Joe and Jane pay in poorer wages and conditions for the trillion dollar US deficit, much of which was incurred by the treasury in bailing out moribund banks “too big to fail”. Knowing that, the mainly Republican banksters milked their bonus scam—collecting huge bonuses for selling and reselling junk bonds in a type of Ponzi scheme which inevitably would collapse, but not before bankers and financiers had lined their pockets at the expense of the taxpayer.

The Republicans also want to slash funds for education by some $5 billion, even though Education Secretary, Arne Duncan, has warned that the United States must better educate its kids, especially in science and math, or risk becoming uncompetitive in the global economy.

Another sign that China is moving to the top of the science league, the number of quality scientific papers coming out of the country—measured by how often they are cited in other studies—is growing exponentially. How often a peer reviewed scientific paper is cited by another scientist is a key measure of quality. The proportion of Chinese papers being cited is up, while the proportion of citations of US and European papers is down. China already produces more research papers in the fields of natural science and engineering than the United States, which as yet remains in total the biggest producer of scientific papers in the world. But Wagner warned:

On current trends, China will publish more papers in all fields by 2015.