Archive for July 9th, 2008


July 9, 2008


Professor Krugman mentioned the housing bubble, the health care disaster, and the commodities bubble as drags on the US economy that cannot just be entirely attributed to the Bush misadministration (New York Times 7/7/08).

A fourth factor Mr. Krugman did not mention is the lack of investments in infrastructure. It preceded the rest. A dearth of investments in infrastructure is directly related to the bubble economy. Basically, the USA decided to make bubbles rather than serious stuff. A child in a bathtub, playing with iridescent films.

Probably the most important law of physics, underlying all our laws, is the law of conservation of energy. It applies directly to the economy: if all you make is X, you can’t make Y. If all you make is bubbles, you can’t be serious. But not only is the USA not a serious country anymore, it has been losing all moral compass, and its economy on the way.

A micro economic case in point is what is happening in the San Francisco Bay Area, a prime location for the Internet Bubble, the Real Estate Bubble, and the Bubble of Admiration for Venture Capitalist Billionaires. In 1989, there was a strong, but distant quake, part of San Francisco caught fire (Marina district), some freeways collapsed, the eastern span of the Bay Bridge broke (but the shaking stopped seconds before the final collapse). Well, we are now eighteen years later, and the San Francisco Bay Bridge, crucial to the Bay Area economy, has not been replaced yet. It’s built in China, it will take another five years or so, to assemble it. Meanwhile housing codes were not reviewed upwards. In case of a strong local quake, dozens of thousands of local houses, with known architectural weaknesses, will collapse (engineers know this, and it’s regularly published in local newspapers). But never mind: it’s more important to send money and go do stuff in Iraq.

Meanwhile a quake centered on Kobe in Japan killed 6,400. The Japanese toughened up their already tough construction standards. In 2008 a huge quake hit north of Tokyo, creating giant landslides in the countryside, but the large city it struck had only half a dozen people killed, and mostly got through unscathed.

So what’s failing in the USA? Morality. There is such a collapse in morality, that people cannot distinguish truly obscene behavior, let alone do anything about it. The Bay Area is exemplary that way.

While the San Francisco Bay Area is scheduled for a huge quake very soon, it does very little to get ready. Nevertheless a local billionaire, one the richest men in the world (Oracle’s Ellison), thought he paid too much tax for his palatial house, a reproduction of a Japanese imperial palace. So Mr. Ellison talked to star mesmerized natives, and got a three million dollar yearly rebate in his tax, half of it coming from the bankrupt local school district (California is next to last in spending per student in schools, among all US states; it used to be tops). Let’s hope no school collapses in the next quake, for lack of financing reinforcements.

No inquiry about corruption was opened, to throw a light on how that arbitrary rebate was decided. Last week “Don’t-Be-Evil” Google decided that child care for two children would cost more than $57,000, a year (more than the average US family income). Last week, Sergey Brin from Google, a thirty something with a private jumbo jet to roam around private islands, worldwide, was explaining why only the rich need child care: it’s a question of fairness, of everyone carrying his burden, of “supply and demand”. Sergey allegedly said that “he had no sympathy for the parents, and that he was tired of ‘Googlers’ who felt entitled to perks…” When asked how do define “evil” in Google’s slogan, the company president Eric Schmidt told Wired magazine: “Evil is what Sergey says is evil.”

For Sergey, evil is childcare for less than $57,000 for two. In a country such as France, evil is no child care for children. In France, child care comes free, for all, a consequence of global taxes, and it’s provided by true state certified and trained professionals. In Google’s view of the universe, only multi millionaires should be able to afford child care. And that sort of belief and practice pretty much generalizes throughout US society: only US multi millionaires have full access to the rights Europeans take for granted, for the common person.

Economic neofascists believe that only the rich create wealth, so the wealthier the hyper rich get, the more money trickles down. Reagan and his advisers believed in this, but that theory reached its apex in recent years, by setting up a tax loophole (on capital gains) that allowed the hyper rich that so desired, to be taxed only 15% (on their income, that was made into capital gains through tricks). Thus US investment started to look more like Arab oil sheik investment of old: all for the hyper rich, little for the people, and no care for the country. Meanwhile the upper middle class got taxed at practical rates around 50% (of the total tax bill).

The US plutocracy is expert at setting up tax loopholes for themselves, and it is not done yet.

Obama’s tax plan on income, capital gains and dividends strikes the upper middle class at rates higher than any European country (and such rates have been found experimentally to be unsustainable there). Obama and his crafty plutocratic advisers, who know their true masters well, intend to create a huge tax loophole for the hyper rich: after giving a token tax rebate on seniors, they want to NOT tax Venture Capital (so Venture Capitalist such as Mr. Brin will be able to afford even bigger jumbo jets). California, with its broken bridges, broken roads, broken schools, etc., is the central headquarters to World Venture Capital. It’s full of people with a morality similar to Mr. Ellison and Mr. Brin: people who never have enough glittery stuff for themselves.

As the hyper rich advanced themselves and their servants, not only did they divert all too much of the economic activity towards their grandiose little selves, but, through their control of the media and opinion makers, they directed the country towards waste, in a subtly Machiavellian tactic of making the whole country so wasteful that it would hide their own sumptuous waste.

In the end, too little capital was directed towards infrastructure, physical or mental, from bridges, to transportation, to energy, to schools and social spending. The USA became old, and started to break down.

Instead of an arrogant hyper rich, hyper powerful overclass, and waste everywhere, what is needed is to mimic the European countries: big taxes on the TRULY rich and taxes on energy and consumption. But that would require moral courage, and knowing that Europe exists, what is going on there, and what was tried there, and found not to work. As Obama surrounds himself with Clintonistas (example: Rubin, the greatest financial bubble architect next to Greenspan) or Bushmen (example: Richardson, a fanatical Iraq attacker), this learning process seems unlikely.

Without copying France, or Germany, the USA could just mimic Great Britain. The United Kingdom, like most European countries, has copied the French tax inventions: it has huge taxes on energy, a large VAT (Value Added Tax) consumption tax, and it provides efficient health care and social care as government programs; its more aggressive capitalism and much leaner administration has left France and Germany behind in the last decade.

But, of course, Obama is now surrounded by members of the hyper rich billionaire class (Warren Buffet, his main fund raiser in Chicago, a forty something billionaire heiress, Penny Pritzker, the Crown family, and countless billionaires who are “bundlers”, in charge of raking in dozen of millions of dollars among the hyper rich for the Obama “grass-root” fundraising…). The plutocracy knows how to take care of those it advises (cf. the Clinton or Bush fortunes).

So now the US economy is seizing up, quite a bit as what happened in the ancient Roman republic. When the richest Romans became too rich, they made most of the Roman population into simple spectators in their own empire, getting impoverished in all ways, while the Roman GDP was still going up, and up, and up. To keep the People happy, bread was distributed. When the People grumbled, money was thrown at them (see the recent US distribution of money on all modest tax payers). Nevertheless, after three centuries of this bread and circus circus, the Roman army rebelled (in the third century, the appropriately nicknamed century of “barrack emperors”. Not Barack, barracks).

Although trains are the most efficient way to transport people and goods, the lack of investments in these has been astronomical. It would take much more than a trillion dollars to bring a significant part of the US infrastructure in railroads to European levels. But railroads get very little subsidies (whereas corporate jetting around is getting handsome subsidies). The general US economy is made more inefficient that way (the main line from California to New York, carrying all the lettuce and arugula from California, can be observed, going across the Sierra Nevada, on its nineteenth century single track, at ten miles an hour, taking half a day where a quick European train would take half an hour).

But, Americans are eternal optimists. On an upbeat note, the US GDP has been going up forever at an enormous rate, stuffing itself to make Mr. Brin and Ellison, and all their colleagues, the richest men in the world, by far, sometimes overnight. A true glorious miracle, and Americans love true glorious miracles. But they got helped by the little guy. That glory of the great free market, that amazing US GDP, has been boosted by driving ever more inefficient SUVs stuck in traffic jams, living in thermally leaky houses, and plenty of very small little jobs all over!


Patrice Ayme.



Technical Addenda:

1) In the early Clinton administration, there was a debate between Mr. Reich and Mr. Rubin. Reich wanted to push infrastructure spending, Rubin wanted to push the financial bubble “economy”. Rubin won. Now Rubin, one of the main architect of the credit/subprime crisis, his clout mostly intact thanks to his position at the head of the Citigroup board (largest and very disastrous bank), is back as an advisor to candidate Obama (so is Reich).

2) We focused on Brin and Ellison, by pedagogy, and because those venture capitalists head huge international corporations, but they are typical in their morality, and since such people are the guiding lights of the American spirit, they are immensely influential on imposing their morality, namely that of totally unchained plutocracy.

3) Some people would say that taxing the truly HYPER rich around 50% may lead to capital flight. Well, where would they run? To France? Switzerland? Certainly not. Existing laws against tax evasion would just have to be applied . One could argue that big time tax evasion has so far been made possible by the (implicit complicity of the) USA. The big European countries are against it, and have the economical means to enforce it in their sphere of influence (namely the entire planet, except those few places where US influence is greater).

4) The Loma Prieta 1989 earthquake that struck the SF Bay Area was 95 kilometers away from the Marina district, and only around 7 Richter. The Japanese quakes mentioned here struck cities directly, and were around 7.5 Richter. Much stronger local quakes, around 8 Richter, are predicted for the inner Bay Area (on either of two giant faults), within thirty years.