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Les Leopold

By Les Leopold
Author, “The Looting of America”

The Jeffersonian anti-federalists feared that a strong national government would lead our fledgling nation back towards monarchy. Instead they wanted government closer to the people where it would better serve their interests rather than interests of the moneyed merchants and traders.

That not good enough for Tea Party and other conservative activists today: They’re against all government, at all levels. They don’t want government to provide much of anything except maybe a vast military industrial complex. But public schools, environmental protection, social services for low and moderate income people? Fugetaboutit!

The Wall Street-led crash has created the perfect climate for this crusade to eviscerate the public sector, especially at the state and local level. It’s ugly and getting uglier.

With 29 million American unemployed or forced into part-time jobs, tax receipts have plummeted more steeply than any time since the Great Depression. State and local governments are slashing their services–at the very moment when people most desperately need them. This is the very definition of a fiscal crisis.

In a saner world it would be obvious to everyone that state and local governments are not to blame for this mess. They didn’t cause the Great Recession–Wall Street did. And if you can’t see that, then you’re enveloped in an ideological cloud so thick that no facts can penetrate. Even Alan Greenspan, the life-long anti-government libertarian, has confessed that under his watch as Fed chair, Wall Street ran wild, touching off a global economic calamity. So let’s not argue about this any more.

State and local governments are far from perfect, of course. More than a few got suckered into Wall Street’s financial engineering schemes. Some foolishly invested their pension funds in toxic assets. Some allowed their debt to pile up, even while balancing their budgets. Many states, if not most, have been letting their super-wealthy residents pay too little at tax time. Even before the Great Recession, middle and lower income residents shouldered a heavier tax burden than the super-rich (who, of course, deduct their state and local taxes from their federal taxes — assuming they pay any taxes at all).

These problems can be addressed without destroying state and local governments. But now that a genuine budgetary crisis has hit 42 out of 50 states, the knives are out. It’s not just about fixing problems. It’s about revenge.

In New Jersey, where I live, we’re watching Governor Chris Christie try to devour the teachers union as if it were a slice of his favorite cheesecake. He’s not worried that his plan to cut the state’s education budget by a whopping $820 million might harm our children. No, he’s loving the crisis because now he can stick it to teachers all over the state. You choose, he tells them: Do you want wage and benefit cuts, or layoffs? And sorry, parents: If your kid’s after-school tutoring program closes, you know who to blame. It’s those greedy teachers. (In our town the teachers union made concessions and 85 teachers still will lose their jobs.)

We’ll feel the awful effects of state and local budget cuts all over the country, in virtually every area of public life. Parks will be closed and privatized. Libraries will cut hours or close altogether. And we’ll all be trained like Pavlov’s dogs to detest government as we wait on longer and longer lines for basic services and have to tangle with stressed out government employees whose jobs have become a living hell. (When you have a lot of time to kill, try getting your New Jersey license renewed.)

When you strip away all the loose talk about getting our fiscal house in order, Governor Christie and many other conservatives see this as a golden opportunity to crush the last bastion of trade unionism in America. Only 7.2 percent of private sector workers were in unions in 2009, according to the Bureau of Labor Statistics. Pretty grim, from a union point of view. But in the public sector, 37.4 percent of workers are unionized — with the teachers leading the way.

Christie’s no dummy. But you don’t have to be a rocket scientist to figure out how to use this financial crisis to gut public sector workers’ wages and benefits. The argument is simple: Why should private sector workers who’ve lost most of their benefits have to pay taxes to support decent healthcare plans and pensions for those lazy public workers? Hey, those teachers even get the whole summer off!

It’s certainly true that private sector workers’ benefits are vanishing before their eyes. In 1991, 88 percent of Fortune 500 workers got medical coverage if they retired before Medicare kicked in. Now it’s 33 percent. In 1998, 68 percent of Fortune 500 workers had pension plans. Now only 42 percent had them. Meanwhile, public workers not only have pensions, they have good pensions: 80 percent still have “defined benefit” retirement plans. (Federal Reserve Bank of Chicago) So at a time when other workers are watching their 401(k) retirements tank (assuming they have any at all), public workers are still slated to get a fixed monthly pension check. How dare they! Better that we all should have next to nothing than have those pampered teachers get more than we do!

It’s a pathetic argument, but it works.

You hate government? You hate unions? Fine. But do you hate yourself as well? As this race to the bottom accelerates, the budget-cutting mania will act as a gigantic anti-stimulus program, sucking jobs out of the public and private sectors. It’s estimated that in 2010 and 2011, the states’ budget shortfalls will total $375 billion. That will just about wash out the positive job impact of the federal stimulus program.

Job loss leads to reduced tax revenues, which leads to more job loss. No wonder most economists predict we’ll suffer through years and years of high unemployment. (And if you think that the private sector is going to pick up the slack as workers’ purchasing power goes down, please pass me whatever you’re imbibing.)

If we could just get over our blinding hatred of unions and public sector workers, we might see that we do in fact have the money we need to rebuild our ramshackle infrastructure, enhance public education and create a new green economy. It’s right there–in the hands of the few. Since 1979 the wealth of the top 1/100th of one percent of all earners increased by 384 percent, while the median earner gained only 12 percent in real wages! (New York Times, ) And yet the effective federal income tax rate for the 400 top taxpayers with the very highest incomes has declined by nearly half over the past two decades–even as their pre-tax incomes have grown five times larger, according to new IRS data. The 400 wealthiest Americans alone have more than $1.3 trillion (not billion) in wealth – just 400 people!

A surcharge on these super-rich individuals could help fund our collapsing public sector. Plus, as a matter of simple justice we should have our Wall Street barons pay reparations for the damage they have done and still are doing. After all, they’ve just walked off with $150 billion in bonuses derived directly from our bailout money.

The moment is right for the Obama administration and the Democratic Congress to make a very simple case: Wall Street crashed our economy and knocked a giant hole in every state budget. Let’s tax Wall Street’s gambling and bonuses to make the states whole. Under Nixon, it was called revenue sharing. Let’s do it again, and avoid a grim future of service cuts and job loss.

Dream on, you say? Maybe. But each of us actually has a choice. We can either sit and watch as our state and local governments are turned into slaughterhouses, or we can work together to compel the financial elites to pay their fair share. Those of us who are ready to tackle our billionaire bailout society need to form a progressive populist alternative to the Tea Party, and fast.

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Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.

Lilly Ledbetter

Linda D. Hallman

By Lilly Ledbetter
A tireless worker for fair pay

And

Linda D. Hallman, CAE
Executive Director of AAUW  

 A year ago, on January 29, 2009, a new president signed his first piece of legislation into law. The Lilly Ledbetter Fair Pay Act restored workers’ rights to challenge illegal wage discrimination in the federal courts.

It was a proud moment, but we’re sad to report that the job of ending wage discrimination in this country remains incomplete. The Lilly Ledbetter Act became law, but the Paycheck Fairness Act, its essential companion legislation, has stalled in the Senate.

What a difference a year almost made. But the good news for women and their families is that this year we can finish the job.

The Paycheck Fairness Act is a sorely needed update to the original Equal Pay Act signed by President John F. Kennedy in 1963. It would close loopholes, strengthen incentives to prevent pay discrimination and bring the Equal Pay Act in line with other civil rights laws. And it would also prohibit retaliation against workers who inquire about employers’ wage practices or disclose their own wages–something Lilly could have used in her case.

The need for such a law is more urgent today than ever before. It’s inherently unfair that the average woman in America makes, on average, just 77 cents for every dollar earned by men. Families today are more dependent on a woman’s earnings for economic survival than ever before. But in the midst of the worst recession since the Great Depression, pay equity is more than a question of fairness. It’s a question of survival.

Paycheck equity isn’t just morally right. And it doesn’t just benefit women–it benefits families, communities, and the nation. Think about it: When women get equal pay for equal work and finally receive their rightful salaries, those dollars can flow more freely back into the larger economy in the form of consumer spending. Paycheck fairness for America’s working women is itself an economic stimulus package.

The Paycheck Fairness Act has already passed the House of Representatives. President Obama, who co-sponsored the bill when he was a senator, is ready to sign it. But it’s stuck in the Senate–and if it doesn’t pass this year, we’re back to square one. We need to pry it loose from Senate obstruction and pass S. 182 now. It’s time the Equal Pay Act lives up to its name. The women of America have waited long enough.

***

Lilly Ledbetter, a 20-year employee of Goodyear Tire, is perhaps the best known face of the pay equity issue. Linda Hallman is executive director of AAUW. 

***

To learn more, please visit aauw.org

Tom Croft and Leo Gerard

Leo W. Gerard: Tom, your new book, Up From Wall Street: The Responsible Investment Alternative, provides both cautionary tales for those responsible for investing workers’ pension funds and a field guide of practical assistance for institutional investors who want to use responsible investing (RI) techniques. Let’s start with the caution. Why should workers care how their pension funds are invested?

Thomas Croft:  As we discovered when we pulled together the original Heartland Labor/Capital Working Group in 1995, it’s incredible how much we don’t know when it comes to the investment practices and trends that affect workers’ retirement assets and other institutional savings.  Before the crash, workers owned over $9 trillion in pension trusts, and, if we added it all up, working families owned $24 trillion in all institutional savings.  So, steelworkers, teachers, insurance holders, students and college endowments, and the vast majority of our population have an interest in how these funds are invested.   

Since these funds control a majority of public stocks, we have an interest in how those corporations are governed.  In terms of the general economy, we have an interest in the general direction of investment flows.  The historian Kevin Phillips has written about the growing power of the financial services industry.  In the 1970s, manufacturing led financial services by a two-to-one margin.  By 2006, goods production had shrunk to just 12% of GDP while financial services jumped to a “swollen 20-21% of GDP.”   So, financial sector profits, as a percent of domestic corporate profits, rose from 16% in 1973 to 41% in 2000s.   That means that vast waves of our savings and assets—our money—has increasingly disappeared into a dark hole called financialization.  I’ll come back to financialization.

So, what it means in terms of the economy is that the country doesn’t build things anymore.  Remember Allentown, and the song by Billy Joel that described the shutdown of Beth Steel?  Bethlehem Steel was originally constructed to build the nation’s rail systems. And those workers helped build the skyscrapers in New York City, and they helped win WWII.   After the Beth Plant was closed, a new Las Vegas Casino was to be built on the former steel site.  Well, the casino couldn’t find the structural steel, at first, to build the casino.  Kind of ironic, but also tragic 

If we can’t find enough steel to build casinos today, how in the world will we build the green jobs industries of the future?   We need steel to build the Obama administration’s proposed new high-speed rail system, right?   And how will the Allentowns and Homesteads and Youngstowns and Flints of this country, and all of our other rust-towns ever fully recover?  We can’t depend on casino jobs, eds and meds, tourist and service jobs alone to replace the lost manufacturing jobs.   We need a robust domestic manufacturing economy if we are going to benefit from the green jobs boom.

As Lynn Williams once said, “The pension savings of American workers should not only guarantee good pensions.  They should guarantee American workers jobs to retire from.”  Beyond that, pension trusts were collectively bargained benefits that are long-term promises to workers so that they can retire with comfort and dignity.  People gave up wage increases and other current benefits to pay for that promise.  Before pensions, and before FDR created Social Security, older workers might be found scrounging through trash bins in the alley or living in poor houses.  Along with Social Security, pension funds are part of a three-legged stool, as it’s called, so that workers can retire without the constant fear of deprivation.   Do we want to go back to the days of the poor house? 

Gerard:  You documented here, and in your earlier work, Working Capital: The Power of Labor’s Pensions, that workers’ pension money could cruelly be used to injure them. Isn’t that investment practice perverse?

Croft:  It’s not only perverse, it should be illegal.  First, as our colleagues put it, there is a gigantic pension industrial complex that is centered on Wall Street that takes hundreds of billions of dollars in fees out of pension funds just to manage our pension funds.  Then, time after time, our money have been sucked and suckered into risky financial schemes that are unsustainable, and eventually crash, destroying the hard-earned savings of tens of millions of workers and their families.  As you have pointed out, before this crash, the country suffered through the savings and loans debacle and the dot-com bust, and similar made-on-Wall-Street catastrophes.  When we come to learn that the CEOs and other financial geniuses who devised these crash schemes all made off with billions in CEO compensation and bonuses, then it’s apparent that we are putting the wrong kind of people in jail.

I’d like to return to the concept of financialization.  A large driver of financialization is the shadow bank system.  The shadow banks include the large banks and investment houses that utilize un-regulated trading and derivative schemes to make immense profits.  They also include the largely unregulated investment funds that invest in the private economy, such as real estate funds, the mega-private equity funds and hedge funds.  These systems became so inter-related that the collapse of one sector then brought down many others.  For instance, when Lehman Brothers went under, the credit default insurance plans that theoretically insured the hedge funds vanished, and the hedge fund market tanked.  After AIG was nationalized, its business continued cratering due to its business selling these default swaps to Lehman and others.  And the pension funds that had invested in these massive hedge funds and the AIGs, etc., then lost tons 

Our pension funds were siphoned into these shadow bank markets.  When pensions invest in alternative investments—not stocks and bonds—there is a term for the ancillary benefits that might result from the investment.  For instance, if a pension fund invests in affordable or workforce housing, the main reason is to achieve a good return on the investment.  But the housing that is also built might be called a collateral benefit.  In Working Capital, Dean Baker and a co-author discovered how hundreds of billions of our trust funds were invested in schemes that caused “collateral damages” for pension beneficiaries, other workers and our society.  For example, our pensions were invested in off-shore sweat-shop corporations—many American owned — that not only exploited third-world workers but also then shipped cheap products back into the country, causing jobs to be ultimately lost here.  And the lure of investing in the dot-coms that never had realistic business plans contributed to the last crash.  

There’s lots of examples, but collateral damage investing continued after the crash.  We all know about the sub-prime mortgage and the housing bubble disasters.  Well, CalPERS, the California public employees pension fund, along with many other state pensions, lost $1 trillion in one case alone by investing in securities backed by sub-prime mortgages. 

A lot of my research went into hedge funds and mega-buyout funds.  Hedge funds were originally designed as an investment program for wealthy investors.   Then hedge assets boomed over the last decade, growing ten-fold from 1998 to 2008 (to over $2 trillion).  From 2002 to 2007, the share of dollars in hedge assets coughed up by institutional investors—including pensions, university endowments, foundations, and insurance funds, etc.–jumped from 2% to 50%.   That’s a lot of money for what became, in essence, a Wall Street game to short markets and firms.  

And the money pouring into private equity, climbing by 2006-2007 to $301 billion, came disproportionately from institutional investors.  In the case of the mega-private equity funds—which in reality looked like the large LBO funds in the 1980s—there’s ample evidence that many of the funds over-leveraged their portfolio firms, leading to firm failures and bankruptcies.  Or worse, they stripped and flipped their acquisitions.  That includes Simmons Bedding, a Steelworker-represented company that just filed for bankruptcy and closed plants.  That includes Mervyn’s, Linens ‘n Things, and many others.  The money that the Boston mega-fund used to destroy Simmons came from pension funds.   Why?

In addition, they have been privatizing many our longest-standing companies—firms that often had good labor relations.  These new Wall Street barons—like KKR, Blackstone Partners and Apollo Partners–now own many of the largest employers in America and Europe; in essence, they have achieved a new stage in corporate ownership.  What does that mean for those workers, communities and our economies?  We should be investing our money to build up companies, not tear them down.

They’ve also damaged many of our civic institutions.  I don’t have to look far to see the damage.  Here in Pittsburgh, CMU and the University of Pittsburgh recently filed fraud lawsuits against Westwood Capital —ostensibly a hedge fund– after their $114 million investment vanished.  And the Pennsylvania public pension fund lost an additional $2.5 billion (than they would have otherwise, according to some estimates) by betting on an extremely large hedge fund gamble (almost 1/3 of total portfolio).  Colleges, states and municipal pension funds are cash-strapped.  That’s no reason to bet the farm. 

Worse, Congress and the White House have not passed meaningful financial reforms that might have prevented or moderated the 2008 crash and the ones before it.  The author Tom Wolfe dubbed these new corporate owners the “New Masters of the Universe.”  I call them the Shadow Bank Robbers.   Not only should government and institutional investors force transparency, reasonable fees and prohibitions against practices that harm workers, companies and communities, we should re-regulate, bring back the New Deal protections that were discarded.  And it wouldn’t hurt if we put the shadow bank robbers behind bars.  Bernie Madoff got caught running what he called a hedge fund; thousands of uber-financiers are making off with billions running an even larger ponzi scheme that is perfectly legal.  It’s crack finance, and it should be illegal.

Gerard: What struck me in your book is these two sentences:

“This book tells the story of a group of responsible enterprise and real estate investors who are profitably investing pension and similar assets in good jobs, affordable housing, and a green future. This book shows how workers’ capital, endowments, and other institutional investors, through responsible investment principles, can do well and do good at the same time.”  

My emphasis added because I think most people would not believe you could do both. They would think that if you made socially-correct investments, you would lose money. What did your research show?

Croft:   When I started writing the book, I traveled to towns and cities all over North America.  I came to know some remarkable and innovative stewards of our capital…worker-friendly investors who have built projects and invested in ventures and companies in ways that make you proud.   These investors were managing about $35 billion.  And, in fund after fund, investment after investment, these responsible fund managers have been—for the most part–financially successful. 

None of the real estate funds that I surveyed in this field guide were investing in sub-prime scams.  And none of the private enterprise investors were investing, as far as I know, in the LBO over-leveraging strategies that failed so dramatically.  So, the book shows you can do well and do good.   How?  They’re making honest profits (for our pension funds) but also treating workers with respect, investing in affordable and multi-family housing, advanced manufacturing and green jobs. 

In Pittsburgh, for example, pensions invested some $3/4 billion in worker-friendly real estate funds that successfully built multi-family housing, revitalized brownfields and re-built new commercial workplaces all over the region.  And worker-friendly enterprise funds have, in fact, saved steelworker jobs of two manufacturing firms that were bankrupt.  So, thousands of jobs were created or saved just in this area.  And these investments were the tip of the iceberg, as I’m sure many of the large redevelopment investors in the region were capitalized by institutional investors.

So, my book shows that worker-friendly investment funds have indeed had singular and significant impacts on the regions, economic sectors, companies and projects in which they invest.  Most of the funds met or bested their respective investment benchmarks.  The portfolio investments showcased in the field guide yielded not just good returns-on-investment, but also collateral benefits for working people and the environment. 

Gerard:  So that is terrific news for workers. You’ve given me the big numbers. In the book, though, you provide specific examples where these investments worked out both for the investors and workers. Would you give one here?

Croft:   There are so many important examples.  The AFL-CIO Investment Trusts worked on efforts to rebuild New Orleans, including a factory making sustainable manufactured housing.  The MEPT Fund rebuilt a burned down hospital on the north tip of Roosevelt Island, New York, and converted it into an award-winning green housing community with 500 units, plus a daycare center and essential amenities.  The KPS Capital Partners Fund restructured a bankrupt transportation company with factories in towns like St. Cloud and Crookston, Minnesota, and Winnipeg, Manitoba, now employing 1,800 union workers making hybrid busses. 

And, let’s take a really big case that helped Steelworkers.  On May 14, 1999, in the largest union-led buyout in the country since 1994, KPS Special Situations Fund partnered with other investors and a minority ESOP formed by employees to buy a pulp and paper mill, an extruding plant, and five converting plants from Champion International (for $200 million), which was distressed.  The new company, Blue Ridge Paper Products, was launched with 2,200 new employee owners.  Blue Ridge is a leading integrated manufacturer of liquid packaging, envelope paper and coated bleachboard used in food service packaging. The Company also produces specialty uncoated and extrusion coated papers. 

The Company had eight manufacturing facilities located in seven states, including the paper mill in Canton, North Carolina, the extruding mill in Waynesville, North Carolina, and in five Dairy Pak converting plants in Georgia, Iowa, Texas, New Jersey & Olmsted Falls, Ohio. Blue Ridge subsequently acquired another Dairy Pak plant in Richmond, Virginia from MeadWestvaco.

And, this company became greener.  The Canton mill became a charter member of the EPA National Achievement Track Program in 1999.  Due to a $400 million investment in new technology over a decade, the facility is one of the most efficient and environmentally-friendly pulp mills in the world.

In July 2007, Blue Ridge was sold to Packaging Holdings Corp.  KPS returned approximately 2.5 times its invested capital to its investors—including pension funds– and employee-stockholders had approximately $30 million of cash deposited into their ESOP accounts.  What a huge success!

Gerard:  Let me press you a little bit, though, because everyone will be asking this question when pension funds have suffered so badly during this downturn in the economy.  Would responsible investing have made a differenc 

Croft:  In my travels, I watched as great states and communities buckled from the weight of the Great Recession: Downstate New York.  The auto towns of the Great Lakes states.  The strapped communities of California.  From years of working in Pennsylvania, I’ve come to understand what happens when investment markets red-line communities.   Boom towns go bust, and rust towns take their place.  When the economy falls as rapidly as it did, most sectors of the economy get dragged down.

This was the largest market crash and recession since the 1930s.  So, many of the investments by even good investors were bound to be weighed down.  But my point has been that irresponsible investment practices—using our money—were a large factor in the crash, as they have been over and over.  

Some of the worker-friendly investors will inevitably suffer because the firms they’ve invested in are now having a hard time.  Some of the real estate funds have suffered redemptions from pension funds having to re-balance their assets (since pension funds lost so much in the general markets).  But as I said, the responsible funds did more due diligence, so their investments were not as risky.  If they’ve had trouble, they’ll likely recover quickly. And some funds have actually done pretty well since the downturn started.

So, we also know that it’s time that our assets are put to work for the long-term, and not in ways to destroy our economy.  With the Obama Administration’s help and guarantees, for instance, we could co-invest real money to re-build our cities and towns, and re-grow and re-shape this economy.   And our money should be invested so that markets serve society—community, in other words– and not the other way around.   We indeed have the capacity to construct infrastructure, reinvigorate our cities, and create those highly-anticipated green jobs for our children.   We just have to re-claim control of our money.

Gerard:  Well, let’s talk for a minute about California Public Employees Retirement System, then, the nation’s largest pension fund. CalPERS did engage in some responsible investing, as noted in your book. But it has suffered terribly and is expected to fire some of its real estate investment managers. Is that simply a result of the market and could not have been avoided?  Or should they really, in your estimation, have been doing something else.

Croft:   For all the things that CalPERS did right in terms of double-bottom line investing, as it’s called—investing in green housing and buildings, urban investments, and clean technology– it may have been overly aggressive in alternative investments.  And CalPERS was caught up in the sub-prime and real estate bubble markets.  CalPERS is, in fact, suing Moody’s and other ratings agencies because the pension fund claims that it did not know that a $1 trillion investment in securities (that I mentioned earlier) were in fact backed by sub-prime mortgages.  And some of their high profile investments in large real estate projects and overly-risky private equity have been slammed.  But CalPERS has recovered to the $200 billion level, and, given the fiscal crisis in California, we’re all hopeful that recovery will continue.  Some of my labor friends are now concerned that CalPERS is going back into the “dark pool,” doubling down in hedge funds and the mega-LBO funds to make up for the losses.

Gerard: What kind of response have you gotten to the book and what do you hope will happen as a result. 

Croft:   It’s really been great.  We’ve started to get a lot of coverage, and the book is making the rounds.  I’d like to see Heartland be able to create an ongoing “Center for Responsible Capital” so that we can continue to push responsible investments and act as a watchdog for union members and communities against investment abuses.

Your earlier support and that of the union has allowed me to write this book.   And, your leadership in capital strategies, rebuilding manufacturing, and kicking off the green economy has provided a lot of inspiration for the book, and we actually quoted you a couple of times—simply because it could not have been stated better.   We’ve now come to understand that responsible investors have been, profitably, creating hundreds of thousands of good jobs, building hundreds of thousands of living spaces, and helping to rebuild cities and communities.  So, as you said, our capital stewards can indeed invest in a responsible future—our future, and that of our children—and invest in a vision of the economy that’s more humane and sustainable.

***

Thomas Croft is an international expert on innovative capital strategies and jobs-oriented economic revitalization policies. He serves as executive director of the Steel Valley Authority, a regional economic development organization for Pittsburgh and 11 municipalities in the Mon Valley. The authority uses creative techniques to preserve and revitalize companies in crisis. Croft also is director of the Heartland Network, a working group of responsible pension investment advocates in the U.S. and Canada. Croft was commissioned by the Heinz Endowments to write Up From Wall Street.

John Russo

Sherry Linkon

By John Russo
Co-Director of the Center for Working-Class Studies at Youngstown State University
and Coordinator of the Labor Studies Program in the Williamson College of Business Administration

And

By Sherry Linkon
Co-Director of the Center for Working-Class Studies at Youngstown State University

During the 1980s recession, as steel mills closed and auto plants began downsizing around the country, neoconservative economists insisted that the jobs lost to deindustrialization would soon be replaced by new jobs.  In Youngstown then, we knew better.  And as we wrote seven years ago in Steeltown U.S.A., Youngstown’s story in the late 70s and early 80s has not only persisted here, where unemployment is among the highest in the state and the poverty rate hovers around 30%, but has become America’s story today.

Youngstown learned then how real economic shifts could be exacerbated by ideology: the idea that businesses and investments matter more than ordinary human beings and the notion that we should just get used to economic patterns that create long-term hardship for those with the least power and resources.  Youngstown learned more than 30 years ago how damaging such ideas can be.  Once again, the rest of America is learning that lesson today.

The gap between the Wall Street recovery and the continuing jobs recession was highlighted by Friday’s jobs summit.  Communities around the country understand that we are in another jobless recovery that leaves hundreds of thousands of American families vulnerable.  While markets have stabilized for the moment and investors are feeling more confident, the economy isn’t improving for most Americans.

So is the current situation just like the earlier recession? No. It is worse. As Peter Edelman and Barbara Ehrenreich note in Sunday’s Washington Post, the current economic crisis reveals the glaring problems left behind by the welfare reform of the 1990s, a policy change that reflected the long-standing assumption that poverty is a “voluntary condition” and that every able-bodied adult should simply find a job – “even when there are obviously no jobs available.”  When we removed the safety net because of conservative and neoliberal worries about “fostering dependency,” we created the economic conditions that left 17.1 million Americans living in extreme poverty in 2008 – and no doubt even more today. As we learned last year, we’re willing to bail out corporations but not working people.

The current recession is also worse because it isn’t just a matter of jobs.  It’s a matter of ideology.  Blaming the victim and normalizing long-term economic struggle were part of the discourse at the jobs summit, during which Jan Hatzius, chief domestic economist at Goldman Sachs, acknowledged that unemployment will likely remain high for a long time.  She suggested that we may just have to get used to it.  Why?  Because those who have been unemployed for a long time are losing their skills and their work habits.  No doubt, long-term unemployment affects people, but the idea that unemployment will last a long time because workers won’t be prepared to return to work represents the most absurd, cruel version of blaming the victim.

On the other hand, Hatzius is not wrong that we’re in for long-term unemployment and underemployment– problems which are far worse than the official unemployment rate suggests. No doubt, business takes the cautious path during economic downturns, often by adding hours to workers’ schedules rather than by hiring additional workers. But as we learned in Youngstown, the reality is that those jobs may never come back as businesses, especially manufacturers, continue to disinvest in the United States.

At the same time, as we have argued before, we’re also witnessing long-term shifts in the nature of the jobs available.  Promises about a new “creative worker” economy or green jobs that will someday provide some former steelworkers and autoworkers with new versions of manufacturing jobs fall short when we remember the latest predictions of the Bureau of Labor Statistics:  that the job categories predicted to grow most over the next few decades involve primarily low-wage, low-education service positions.  Many of these jobs pay less than $21,000 a year.  That means that poverty is going to be a long-term problem for American workers.

What we need, in other words, is not a single jobs summit. We need long-range policy planning aimed at creating a better system of supports for the working poor and unemployed.  We need to recognize that as much as education matters, it won’t necessarily overcome long-term employment trends and growing income inequality.  We need economic policies that focus on the poor and working class and that treat them with respect, rather than blame.

Too often, economic theory has provided a distraction from the real struggles of real people.  Jan Hatzuis and her colleagues might do well to stop worrying about the work habits of the unemployed and start learning about what it’s like to lose a job after you spent years doing everything right, about the indignities associated with applying for government aid as you struggle to survive job loss, about how limitations of K-12 education, urban transportation, limited access to fair banking, overcrowded housing, persistent hunger, and lack of health care make finding a steady job that pays enough to support a family incredibly difficult.   A little moral education might help as well.

We need to stop thinking about the current crisis as a temporary recession, and we certainly have to stop talking about the economic crisis as part of an inevitable shift we can’t do anything about.  We have to recognize and act on the situation as what it is: a moral crisis.

The Obama administration must take the problem as a moral imperative, acknowledge that the private sector simply won’t solve the problem on its own, and like Franklin Delano Roosevelt, create a jobs-centered stimulus that is environmentally sound, improves the national infrastructure, and provides an economic foundation for working Americans and rebuilding the American economy.

The economy isn’t a game, with winners and losers who deserve what they get, because the players don’t occupy a fair playing field and the rules are biased.  Inequality has long been and is becoming more deeply engrained in the American system.  We cannot continue to view long-term high unemployment rates, minimal public supports for the poor, and a permanent and increasing gap between rich and poor as normal much less acceptable.  We can do better.  “Yes, we can.”  And we must.

Leo W. Gerard

By Leo W. Gerard
USW International President

Defying popular stereotype, CEOs and labor representatives sat on a panel and largely agreed on major issues confronting industry and working people.

It happened Monday, Nov. 30 as CNBC taped “Meeting of the Minds: Rebuilding America” in a hall at Carnegie Mellon University before an audience of nearly 600 students, businessmen, steelworkers and other trade unionists.

For the broadcast Dec. 2 at 8 p.m., host Maria Bartiromo said the Steel City of Pittsburgh was chosen because:

“It was here that America’s soul was forged.”

She assured the audience that the panel of speakers – Dan DiMicco, President and CEO of Nucor Corp.; Bill Ford Jr., Executive Chairman of Ford Motor Co.; Jeff Immelt, Chairman and CEO of General Electric; John Engler, President and CEO of the National Association of Manufacturers; U.S. Labor Secretary Hilda Solis, and me  — would tell them how to put America back on track.

Since precious few Americans, even those in the same political party, agree on how to realign America, that’s when a typecast smack down between CEOs and unionists might have begun.  

But it didn’t. That’s because on the most crucial issues, like manufacturing strategy and trade policy, the panel pretty much concurred.

Really.

For example, this is the United Steelworkers’ position on manufacturing strategy: America needs one.

The lack of a strategy handicaps the U.S. when it attempts to compete with virtually every other industrialized nation in the world. They have policies. They’ve decided which manufacturing areas they’re going to emphasize and support. And they do that with taxes, tariffs, loans, grants, even higher education guidelines.

As I said that night:

“We need to have a plan. All the other major countries in the world have plans. I am not mad at China. I am mad at us. They are doing what they need for their people.”

Bill Ford and Dan DiMicco joined that position.

Ford said, for example, that he met recently with the president of another country where his company manufacturers cars. That president, who he did not name, asked, “How can I help you?” Ford said that country already had a manufacturing strategy, so he could have a conversation with that government. But, he said, today, in the United States, that same conversation “is almost impossible because there is no policy.”

DiMicco agreed. He stressed that a manufacturing agenda must be designed, and he said he believes that is now being done with the support of President Obama’s administration. “We need to create jobs for 30 to 40 years, not the short term,” he said.

Here’s something else we agreed on: trade laws must be enforced and improved. The failure to do so has led to huge U.S. trade deficits and the migration of millions of good, middle-class manufacturing jobs overseas.

Several USW officers went to Washington, D.C. the day after the CNBC show taping to testify before the U. S. International Trade Commission in an attempt to save the U.S. industry that makes specialized steel pipe that is called oil country tubular goods. Between the end of 2008 and September of 2009, this industry lost 2,421 workers because of a killer cascade of unfair Chinese imports.

The USW union is joined in this petition by U.S. Steel Corp., Maverick Tube Corp., Evraz Rocky Mountain Steel, TMK IPSCO, V&M Star LLP, V&M TCA, and Wheatland Tube Corp.  Now there are a few more CEOs who agree with the USW.

During the CNBC taping, Immelt conceded that the policy of trying to put factories on barges to ship them overseas in search of the lowest labor costs, “has turned out to be not such a good idea.” For manufacturers like GE, and the  U.S. workers who lost those jobs, America must enforce trade laws and create a manufacturing policy to establish the  incentives essential to keep those factories at home in the U.S.

I have been ranting about trade for a long time. Rarely have I heard someone as angry about it as I am. But DiMicco clearly is. Listen to what he told the CNBC audience: 

“You should be a lot ticked off about the failed trade policies in Washington, D.C. . . . That has destroyed the middle class in this country.”

One of those from the audience permitted to ask the panel questions seemed more ticked off about the trade union movement than failed trade policies. She asked Ford if shedding the United Auto Workers would enhance his bottom line.

He said no:

“We are very happy with our union work force. There is a misconception that we want to get rid of the union.”

He said Ford collaborates with its union workers. He noted that he is a fourth generation Ford and walks through plants greeting many fourth generation UAW workers who are committed to Ford’s success. “Together we have gotten a lot done,” he said.

Union leaders have no qualms about negotiating with CEOs like Bill Ford for a fair split of the profit-pie in collective bargaining. But first, working together, we must make sure – with a manufacturing strategy and strong, enforced trade laws – that there is a pie.

Gilbert B. Kaplan

 By Gilbert B. Kaplan
Former Deputy Assistant and Acting Assistant Secretary of the U. S. Department of Commerce

If you were going to start a trade war against the United States, it is unlikely that your first salvo would be on chicken parts, or as the Chinese rather charmingly first announced, on dorkings. A dorking is a five toed chicken that flourishes in Surrey, England. The normal chicken has four toes. If you have not heard of dorkings before, you are not the only one.

But this is where the Chinese government focused their retaliation earlier this week, in response to President Obama’s decision to impose duties on Chinese tires. To step back, on September 11, President Obama took one of the best and strongest decisions that has been made on trade issues in this town for a long time, imposing duties ranging up to 35% on surging imports of tires from China. In so doing, he overturned eight years of precedent established by his predecessor who had declined to enforce a trade statute called Section 421. Section 421 is a trade statute China agreed to as a condition to becoming a member of the WTO; and it is designed to deal with low cost imports from China that surged into the U. S. after they joined.

It is a trade remedy that makes good sense. As a benefit to China when they joined the WTO, U.S. duties on goods coming in from China were lowered permanently across the board, generally to a zero rate. But China agreed, in turn, that up until 2013 we could impose short term duties to off-set import surges that might result from this change, when the surges harmed our industries and workers during the break-in phase. Since that time, industry after industry in the U. S. has faced these import surges, but it was not until now that the U. S. acted.

The reaction from the Wall Street Journal, George Will, David Rockefeller writing in the New York Times, and many other supporters of the status quo was to declare the beginning of war and the end of trade as we know it. And to bemoan the beginning of protectionism. And finally, to invoke the memory of the Smoot-Hawley tariff and usher in the beginning of the second great depression.

There will be no trade war. For the Chinese to declare a trade war on the United States in retaliation for the U. S. actions would be roughly like Wal-Mart declaring a trade war on the American consumer or Walt Disney declaring a trade war on America’s children. The United States is the best friend economically China has. It is basically China’s free lunch. We have thrown open our enormous market–still the largest in the world by far–to Chinese imports and run a sustained trade deficit with China of over $100 billion a year since they joined the WTO. Our deficit with China is now over $250 billion per year. We lowered out tariffs to zero and admitted China to the WTO because we believe in free trade, but this was not something the United States had to do. We could have blocked their entry. So the prospect of China wanting to strike back on something beyond dorkings that would really hurt our economy is nil. Though they have threatened action on auto parts as well, this has not yet materialized and even the value of our auto part imports into China is small.

Nor can President Obama’s action be called protectionist. China agreed in its Accession Protocol with the rest of the WTO members and the United States that such short term safeguard measures could be applied against them. Just as their enormous trade access to our market is a result of the WTO agreement, so is the short term adjustment action President Obama took. The duties will only remain in effect for three years. This is exactly the kind of case this remedy was designed for. Passenger tire imports from China did indeed surge during the period of review, 2004-2008, increasing by well over 200%, and causing over 9,000 U. S. job losses through this year, and the closing or idling of many U. S. production plants. And to say that the application of this 421 remedy has been overzealous by the United States borders on the absurd. Only six other cases have even been filed under the statute. Of these, the International Trade Commission, a bi-partisan independent agency, has found injury in four others, but in none of those has the President ever imposed a remedy. This is the first in eight years.

And as to the dire warnings of the onset of the next great depression, the economic evidence all goes in exactly the opposite direction. We have lost millions of manufacturing jobs since 2001 in this country. If we do not take action to brace up the manufacturing sector and allow more reasonable adjustments to globalization, it will be this failure that will prolong and deepen the recession we are already in. Yesterday’s job numbers, showing a continuing increase in the unemployment rate to 9.8%, the highest level since 1983, demonstrate that.

The fundamental point is that many people in this country, including those represented by the commentators mentioned above and those wailing about the horrors of the tire tariffs are making an enormous amount of money by moving jobs to China, building factories there financed by Chinese government largess in the form of subsidies, and avoiding the environmental, health care, and corporate tax costs they would have to pay here. So they stand up against even the most measured trade actions, meant to help the American worker and manufacturer.

No, there will be no trade war. It’s just too hard to imagine the war cry, “Let the Dorking Wars Begin!”

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 Mr. Kaplan is the Former Deputy Assistant and Acting Assistant Secretary of the U. S. Department of Commerce and he is currently a partner in the international trade firm of King & Spalding in Washington, D. C. He filed the first successful anti-subsidy case by any U. S. industry against China, which led to large anti-subsidy duties on imports of Chinese pipe into the United States in 2008. Mr. Kaplan can be contacted at gkaplan@kslaw.com.

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This piece was first published on The Huffington Post

Peter Navarro and Leo Gerard

Leo W. Gerard: Your chapter in the new book, “Benchmarking the Advantages Foreign Nationals Provide their Manufacturers,” describes in devastating detail how China in particular, but also other major U.S. trading partners, violate international rules. The abuses you document make clear that it’s impossible for American manufactures to compete internationally. U.S. corporations responded by off-shoring manufacturing and millions of American jobs. Why does the U.S. put up with this unfair trade?

Peter Navarro: The Bush administration put up with unfair trade because it was distracted by the war on terrorism and because of its blind ideological commitment to free trade, regardless of the unfair trading practices adopted by our trading partners. The Obama administration is putting up with unfair trade with China because it is under the mistaken notion that it’s more important for China to keep financing our budget and trade deficits than for this country to crack down on unfair Chinese trade practices so that we can restore our manufacturing base. Consumers — oblivious to the destruction that the Chinese have done to our job base — have put up with this unfair trade because in the short run they get cheap Chinese goods. The National Association of Manufacturers puts up with this unfair trade because many of its members have offshored their production to China and now find it in their interests to oppose trade reform. What is critical in the politics of this whole situation is that the American people clearly understand how unfair trade practices translate into fewer jobs and lower wages and a bleak future. Only when the American people see the chessboard more clearly will our politicians act appropriately.

Gerard: The result of decades of losses is, as you put, the “hollowing out” of the U.S. economy. It depressed wages, lowered the standard of living, created recession conditions in the Midwest – even before the current great recession. Typically, in the mainstream media, the loss of industry routinely is blamed on unions seeking what we believe is decent wages and benefits. Your chapter provides a shockingly different story. Why don’t we hear that?

Navarro: Labor unions have become a common “whipping boy” for the recessionary ills that have afflicted the US economy off and on for several decades now. One problem is that much of the financial press has a strong, antiunion bias. A second problem is the far too parochial nature of American politics. Far too many Americans — and I include many members of the American press corps here as well — simply don’t understand some of the complexities of the global economic environment that have helped trigger the US recession. The case of Chinese currency manipulation is a perfect example. Very few politicians or pundits — much less the American people — understand how China pegs the yuan to the dollar and how an undervalued yuan acts as a subsidy to Chinese exports to the United States and a tax on US exports to China. Nor do these politicians and pundits understand how this currency manipulation affects the stock market or interest rates or the rate of off shoring. Because the effects of globalization are complex, labor unions make an easy target.

Gerard:  For those unfamiliar, because it isn’t covered much, would you explain how China can be both a mercantilist and a protectionist state, and the effect of that economic behavior on the U.S.?

Navarro:  In thinking about the issue of trade reform, it is important to distinguish between mercantilism and protectionism. A mercantilist state uses tools like illegal export subsidies and currency manipulation to increase its level of exports to other nations at the expense of jobs and income in those nations. In contrast, a protectionist state uses unfair trade practices like quotas, forced technology transfer, and regulatory barriers to prevent foreign competitors from entering its markets. As a practical matter, any state that engages in protectionism likely also is a mercantilist as well. In the world arena today, China is the reigning Emperor of both mercantilist and protectionist practices. The scope of what this “beggar thy neighbor” country does in direct violation of the World Trade Organization rules is breathtaking, and it is precisely these mercantilist and protectionist practices that I outline in my chapter in the book.

Gerard:  Can we talk for a minute about currency manipulation because this is something you hear a lot, but, again, it’s rarely explained. You provide great descriptions in the chapter of why China’s undervaluing the yuan “makes exports cheap and imports dear,” as you put it. Can you give us a primer here?

Navarro:  As a practical matter, any given country can choose between a fixed or a floating exchange rate system for its currency. In a floating exchange rate system, the value of the country’s currency is determined by supply and demand conditions in the international market. Currencies that float and trade freely everyday include the dollar, the euro, the yen, and the Swiss franc.

In fact, floating exchange rates represent a crucial element of any free trade regime that benefits all nations. The reason is that floating exchange rates act as a natural market mechanism to prevent any trade imbalances between countries. If one country like the United States runs a trade deficit with another country like China, the value of its currency should fall relative to the other currency. A falling currency will boost that country’s exports because its exports will be cheaper to sell while it will reduce its imports, because imports will become more expensive. In this way, the trade will come back into balance in a floating exchange rate system.

The problem is that some countries like China embrace the alternative of a fixed exchange rate system. In China’s case, it tightly pegs the value of the yuan to the US dollar. This means that no matter how big the US-Chinese trade imbalance, the dollar can’t fall relative to the yuan and bring trade back into balance. 

China pegs the yuan to the dollar in a very complex process, but in a simplified example you can think of it this way. American consumers go into Wal-Mart and buy a bunch of cheap Chinese goods with American dollars, and these dollars are exported over to China. Ordinarily, the surplus dollars would put downward pressure on the value of the dollar relative to the yuan. However, to reduce these pressures the Chinese government sweeps up these dollars in a “sterilization” process which involves selling bonds to Chinese citizens at interest rates of a little more than 4%. China then turns around and uses these sterilized dollars to buy US government bonds at interest rates of less than 2% — thereby losing a considerable amount of money on the deal. The Chinese government is willing to incur these losses, however, because by buying US government bonds, it bids the value of the dollar back up so that China can maintain its dollar-yuan peg. At the same time, China’s purchase of US government securities also helps lower US interest and mortgage rates — a kind of financial heroin that makes America feel good even as China steals its jobs and destroys its manufacturing base using this currency manipulation as a weapon.

Gerard:  I think that after the Olympics were held in China, a lot of people became aware of the high level of pollution there. So while American companies must pay decent wages and control pollution, Chinese companies don’t. But you detail much more insidious internationally illegal competitive advantages China has over the U.S. One of those is forced technology transfer. Can you describe that?

Navarro:  While currency manipulation and China’s high levels of illegal export subsidies rank as two of its most important mercantilist practices, China’s forced technology transfer represents one of its most insidious protectionist practices. The idea of forced technology transfer is that if a company like General Motors and General Electric or Intel wants to set up production facilities in China and sail into the Chinese market, it must surrender some of its technology to the Chinese in order to do this. This practice is, of course, one of the most blatant violations of the World Trade Organization. However, American corporate executives rarely challenge this practice because they are all too eager to play in the Chinese market. Over time, however, the practice of forced technology transfer in China is a one-way ticket to the destruction of the American technology base. If in the short run, American corporations surrender their technologies to China, eventually, over the longer run, China won’t need these American corporations, and they will be quite ironically run out of China by their own evolved technologies.

Gerard:  You describe virtually all of these practices as being illegal under international treaties or World Trade Organization rules. People who are so hot for free trade must know that China is violating these rules. Is it correct to say that the U.S. simply is not demanding enforcement of the regulations to its own detriment?

Navarro: That is absolutely correct — the US government has failed abysmally at using the tools at its disposal to crack down on Chinese mercantilism and protectionism. The Bush administration failed to do so because of its preoccupation with the war on terror and its misguided ideology. The Obama administration is even more culpable because it fully understands the damage that China is doing to the American economy. However, the President, the Treasury Secretary, and the United States Secretary of State have all decided that it’s more important that China continue to finance our budget and trade deficits than it is to challenge China on trade reform. The problem with this strategy is that it guarantees the long run secular decline of the American economy, which will come as an inevitable result of a further erosion of America’s already weakened manufacturing base.

 ***

Peter Navarro is a best-selling author and CNBC contributor. His most recent book is “Always a Winner: Finding Your Competitive Advantage in and Up and Down Economy.” Mr. Navarro is also the author of the worldwide bestseller, “The Coming China Wars,” and the bestselling investment book, “If It Rains in Brazil, Buy Starbucks.” He also wrote the management book, “The Well-Timed Strategy.” With a Ph.D in economics from Harvard, Mr. Navarro is a business professor at the Merage School of Business at the University of California, Irvine. He is an expert in macroeconomic analysis of the business environment and financial markets. He has been featured on “60 Minutes,” and his articles have appeared in publications such as “Business Week,” “The New York Times,” and “The Wall Street Journal.”

Roger Bybee

By Roger Bybee
Milwaukee Freelance Writer

As rescue attempts go, the Obama administration and its Auto Task Force are pursuing a peculiar course: They seem intent on keeping General Motors and Chrysler afloat as corporate entities by tossing more U.S. workers overboard.

Even as unemployment rates soar in longtime GM-centered communities hit by shutdowns, such as Janesville, Wis. (14.7 percent), and Flint, Mich. (15.3 percent), Obama and his task force pressed GM and Chrysler for more cuts. GM plans to shut down at least 14 factories and discard some 21,000 workers. Chrysler is closing eight U.S. plants, though it claims that somehow its merger with Fiat will result in a new increase of 5,000 jobs. In a telling observation that carried unsettling echoes of Bill Clinton’s push for NAFTA, the New York Times called the job cuts and other worker sacrifices “steps that most analysts thought could never be pushed through by a Democratic president allied with organized labor.”

The most recent version of GM’s recovery plan-closely tailored to the demands of the task force-calls for a stunning 98 percent increase in autos produced in Mexico, China, South Korea and Japan for the U.S. market. In May, the United Auto Workers (UAW) and United Steelworkers launched a 36-city campaign to prevent GM “from importing small cars from China, a move that would have increased GM’s profits while very likely reducing the number of domestic automobile jobs,” the New York Times reported June 2. This last-minute drive was successful, but it’s still unclear exactly what modifications GM will make.

For its part, Chrysler announced May 1 (the day after it filed Chapter 11 bankruptcy) the closing of its Kenosha, Wis., engine plant and the transfer of many of the plant’s 850 jobs to Mexico. As recently as the day before, top Obama administration and Chrysler officials had assured Wisconsin legislators that the Kenosha plant would be preserved. Faced with a firestorm of protest for using federal dollars to transfer jobs to Mexico, Chrysler now says that Fiat will consider keeping the plant open.

On top of all that, job losses will balloon with the closing of more than 1,100 GM and 789 Chrysler dealerships, eliminating tens of thousands more jobs.

Although Obama hasn’t ordered auto industry cuts himself, “the revamping of the nation’s largest car company is being guided by the administration’s auto-industry task force, and it follows the president’s calls for a leaner, healthier industry,” DowJones.com reported on May 12. The Obama administration’s downsizing of the auto industry, established as a precondition for approximately $30.5 billion extended thus far in loans to GM and Chrysler (with another $20 billion in the pipeline), sharply contrasts with the lightly-conditioned, larger bailout of Wall Street. Nomi Prins, author of It Takes a Pillage, a forthcoming book on the Wall Street meltdown and its roots in Washington, estimated that Wall Street has received $12.5 trillion-nearly 400 times more-in loans, loan guarantees and taxpayer subsidies for the sale of risky loans.

Contradictory policies

Only three of the Auto Task Force’s members were notably pro-labor, despite protests from labor and auto-state lawmakers. “The Auto Task Force members are basically red-pencil types who looked at saving the auto industry on the cheap without much consideration to social costs, let alone generating green alternative jobs for auto,” says economist and author William K. Tabb. “They have the narrowest business criteria for auto, unlike the banks that got capital and loan guarantees worth trillions. So their focus was to save the auto companies but not the auto workers.” Essentially, Obama and the task force wanted a quick and cheap solution to the Big Three’s ailing finances rather than providing an endless flow of resources, as the government did to the “too-big-to-fail” financial sector.

Bizarrely, the Auto Task Force’s policy direction dramatically undercuts Obama’s $787 billion economic stimulus program. “The problem with GM’s new Washington-mandated restructuring plan is that it steps on the gas in the wrong direction,” UC Berkeley professor Harley Shaiken told NPR’s “Marketplace.” “The stimulus package spends $800 billion to create jobs, while billions in loans to GM are conditioned on eliminating them.”

In addition to the factory job and dealership cuts, GM will unload its Pontiac, Saturn and Hummer brands. By contrast, the Italian government provided $1.7 billion in aid to Fiat as long as Italian plants stay open, noted Robert L. Borosage of the progressive coalition Campaign for America’s Future. Also, France loaned $8.5 billion to its big three automakers, in exchange for pledges to keep jobs in France.

Labor advocates fight back

After months of the UAW trying to avoid a fight with Obama, in early May it began openly challenging the use of taxpayer loan money to finance the outsourcing of jobs. “We believe (GM) should have an obligation to build in this country the vehicles it will be selling in the U.S. market, thereby maintaining the maximum number of jobs in the United States,” UAW legislative director Alan Reuther wrote to the Senate.

Former Clinton Secretary of Labor Robert Reich blasted the notion of paying billions of taxpayer dollars to keep companies afloat while they cut tens of thousands of jobs and wages. “We’re transferring money from taxpayers to Big Three shareholders for no apparent reason other than the Big Three are headquartered in America,” he said. “Why should taxpayers foot any of this bill unless the Big Three agree to keep their workers employed while they try to turn themselves around?”

The full answer to that question remains unanswered at this moment, as the two corporations’ plans for future outsourcing are unavailable. But significantly, the Auto Task Force didn’t explicitly require that federal assistance be directed to renewing production in the United States. Furthermore, following conventional management wisdom, “the Obama administration structured the GM and Chrysler plans to lessen the union’s voice in management,” the New York Times stated.

But so far, the mainstream media hasn’t much noticed or criticized the contradictions between Obama’s plans to simultaneously stimulate job growth and shrink GM and Chrysler. With all the attention on unwarranted Wall Street bonuses, major media lump Wall Street brokers’ compensation and CEO pay with autoworkers wages as part of the same culture of “excess.” Reports that autoworkers were paid as much as $73 an hour quickly spread through the media.

Actually, the typical wage is $26 to $28 an hour, plus an additional $10 or so in benefits, according to the Center for Automotive Research. UAW’s agreement to accept a new starting wage of $14.20 an hour with vastly reduced benefits received little attention. Neither did the fact that UAW-represented plants ranked “very favorably” on quality and productivity compared to Japanese “transplants” in the United States, according to independent industry assessments.

Shielded by a lack of accurate and coherent media analysis, the Auto Task Force used a narrow and conventional single-firm turnaraound framework to create a strategy for GM and Chrysler. “A hedge fund wants to make money fast for its client-in this case, the taxpayer-without regard to social cost,” Shaiken says. “Unlike most clients, however, the taxpayer picks up the social cost. Longer unemployment lines and more foreclosures are devastating for the victims, not cheap for the rest of us.”

But the Auto Task Force seemed largely oblivious to the human costs of eliminating thousands of U.S. auto jobs. Obama and his task force withheld billions of dollars in new loans requested by GM until after the company came up with a more aggressive program of job cuts, plant closing and outsourcing. The Auto Task Force rapidly divorced the reinvigoration of GM and Chrysler from a longer-term shift to a fuel-efficient economy and production not just of high-mileage cars, but also of mass-transit equipment for buses and high-speed rail.

Ironically, GM’s ruthless downsizing of its U.S. workforce and outsourcing of jobs over the last 25 years diminished its leverage with the Obama team. GM has discarded 85 percent of its domestic production since 1990-and that was before it hit the current recession and the resultant nosedive in sales. It was no longer “too big to fail.”

So Obama and the Auto Task Force felt free to promote a recovery strategy for the two ailing auto firms that stands in appalling contrast to the generosity shown Wall Street. GM and Chrysler headquarters will remain intact, but thousands of U.S. workers will be vaporized, retiree health benefits could be put on the chopping block (especially at Chrysler) and numerous industrial communities will suffer permanent damage. And the Obama team has forfeited the opportunity to recast the current crisis into a fuel-efficient re-industrialization of America-right when the country needs the stimulus of  high-wage green jobs the most.

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• First published in In These Times. To subscribe, click here.

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Roger Bybee is a Milwaukee-based freelance writer and progressive publicity consultant whose work has appeared in numerous national publications and websites.

Robert Kuttner

Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

We are hearing a lot about the need for a new “Pecora Commission,” to conduct a comprehensive investigation of all the Wall Street abuses that led to the financial collapse and the general recession that has followed. House Speaker Nancy Pelosi has called for such a commission. A House floor vote on a bill sponsored by Rep. John Dingell is expected this week. The bill would establish an investigative panel with full subpoena powers. A companion bill, the Fraud Enforcement and Recovery Act, has bipartisan Senate sponsors, including Senators McCain and Grassley as well as several progressive Democrats. These efforts are an implicit rebuke to the Obama administration’s economic team.

The original Pecora committee was not a commission, but the Senate Banking committee operating in investigative mode. Its chief counsel beginning in late 1932 was a former New York City prosecutor named Ferdinand Pecora. The committee began its work in March 1932, and Pecora became chief counsel later that year. It continued throughout 1933 into early 1934. The new Democratic chairman, Sen. Duncan Fletcher, who took office when the Democrats began the majority party after the 1932 election, kept Pecora in the job. Today, Fletcher is a footnote; Pecora is the name people remember. (As a former chief investigator of the Senate Banking Committee, I love to see Senate staffers make good.)

Pecora’s work unearthed numerous conflicts of interest–a “preferred list” of investors (including President Coolidge and Supreme Court Justice Owen Roberts) kept by Morgan who had access to lucrative securities offerings not available to ordinary customers; the unsavory practice of bank presidents of borrowing money to short stocks, including sometimes their own; and the first wave “securitization,” in which investment banks made sketchy loans and repackaged them as bonds for unsuspecting investors.

Pecora’s work led to several resignations of bank executives, but more importantly in created a climate for reform legislation. Pecora’s findings helped inform the Glass Steagall Act of 1933 separating investment banking from government-insured commercial banking, the Securities Act of 1933 and the Securities Exchange Act of 1934. Most importantly, it functioned as a public shaming of Wall Street. It thus helped change the political climate so that radical reforms could proceed. President Roosevelt encouraged Pecora’s work and he encouraged the public indignation. Pecora was subsequently appointed by Roosevelt as a commissioner of the newly created SEC.

The Obama administration is proceeding very differently, and it has little enthusiasm for a Pecora Commission or for recriminations against financial elites. There has been no dramatic rupture with Wall Street. Rather, Obama’s economic team is working hand in glove with the same investment banking firms and commercial banks that invented and underwrote the financial products and subterfuges that creates the collapse.

Two of Obama’s top people, Lawrence Summers and Rahm Emanuel, did lucrative stints on Wall Street before returning to government (with an outlook substantially influenced by their time in the financial markets.) A third senior official, Treasury Secretary Tim Geithner, was a senior member of the Bush administrations financial crisis team, in his previous job as president of the Federal Reserve Bank of New York. So when Obama succeeded Bush, there was a seamless handoff from Geithner to…..Geithner.

Several other senior Obama economic officials were part of the Clinton economic team that was responsible for so much of the deregulation. Rather than channeling and affirming public indignation as Roosevelt did, the Obama sees populist backlash as a dangerous force to be damped down.

Although there have been some good individual hearings by particular committees on aspects of the collapse, neither of the key legislative committees in the House or Senate has shown much appetite for a Pecora-style investigation. Rather, investigative efforts have been diffused among the Congressional Oversight Panel chaired by Elizabeth Warren, which was created to oversee see the Treasury’s disbursement of $700 billion in bailout money, chaired by Elizabeth Warren; the reports of the Special Inspector General; investigative work by New York Attorney General Andrew Cuomo; and some good hearings by subcommittees. All of the Democratic committee chairmen, however, are under subtle pressure from the White House not to embarrass the administration.

But by refusing a Roosevelt-scale break with Wall Street, the administration embarrasses itself. So we need a new Pecora committee, less to unearth new information than to focus public attention and build support for sweeping reform. Between the work of the Special Inspector General, and the work of other congressional committees, and investigative reports of the financial press, much of the core story has already been unearthed. Commercial and investment banks, their hedge fund counterparties, the mortgage companies and the corrupted credit rating agencies, perpetrated systematic frauds on the public using levels of speculative borrowing that any uncompromised regulator would have shut down. The fraud was central to the business model. William Black has coined the useful phrase, “control fraud,” meaning that the fraud was systematic and emanated from the very top of the business.

With Larry Summers, Tim Geithner, and Ben Bernanke working closely with major investment bankers to restart the system of securitization, this time with the Federal Reserve’s money and loan guarantees from the Treasury, there will be a titanic struggle over what kind of regulatory system to have going forward. Wall Street is resisting any form of regulation of hedge funds and private equity companies, and hopes that a voluntary system for registering derivatives such as credit default swaps will head off stronger medicine.

For a time, it appeared that the issue of regulation of the shadow banking system would be finessed by making the Federal Reserve the “systemic risk regulator.” The Fed (the weakest regulatory agency of the lot) would decide what entities needed additional surveillance.) But that scheme, originally proposed by former Treasury Secretary Hank Paulson in 2006, no longer has much support in Congress. So all of the issues about what to regulate, how, and by whom, are still very much on the table–and a consensus still needs to be created. We need a latter day Pecora Committee to arouse the public and the back-benchers in Congress. Otherwise, the reform moment will pass, and we will revert to something very much like business as usual.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is “Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.”

Robert Kuttner

Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

Dear David,

President Obama faces two huge challenges in the next few months. One is dealing with the reality of an impending depression. It will take much stronger medicine to avert a depression than the measures taken to date, and the president needs to rally public opinion if he is to persuade Congress to act at the necessary scale.

The related challenge is about appearances — about whether middle America feels that the federal outlays are trickling down to regular people. So far, bankers seem to be getting too much and Main Street too little.

The two challenges are related. If the solutions are not bolder, they won’t cure the crisis. If the public isn’t persuaded of the need, Congress won’t act. If the economy keeps sinking, the people will lose confidence in the president’s leadership.

And if President Obama doesn’t boldly address both challenges, his presidency is in trouble. I take heart from some of the subtle shifts in the president’s positioning in recent weeks, but he needs to go farther, and move faster.

At the core of both problems is the sinking economy and the fact that he hired a team of orthodox economic advisers to fix it. A radical crisis requires radical solutions, but the economic team has been far behind the curve in the remedies it has put forward, both in the reality and the optics.

The Reality:

To prevent a slide into depression, you will need to spend roughly another three trillion dollars of public money in order to pay for a second stimulus package (at least a trillion) and to recapitalize the banking system (as much as two trillion.) Neither Congress nor public opinion is remotely prepared for that action yet. No one but the president is capable of the kind leadership necessary to move public opinion in this direction, and Barack Obama is a better teacher than most presidents. But that money needs to be understood as practical help for ordinary American families, not as more bailout for the culprits who created the mess.

Faced with three trillion dollars in additional needs, the administration has only $350 billion at its disposal — the as yet unspent TARP funds. Right now, the administration seems to be trying to spend that money several times over — first as an equity guarantee to anchor more borrowing from the Federal Reserve as the core of Tim Geithner’s latest bank rescue; then as a source of public funds for the auto restructuring; and again as part of the plan to refinance mortgages and prevent foreclosures. This string is more than played out. There are limits, financially and politically, to the use of the Fed as all-purpose piggy-bank. At some point very soon, Congress needs to be brought back in, because your efforts require both Congressional support and a lot more real money. And Congress will only act if the people understand the stakes.

The political reality is that the economy needs to be on the mend by mid-2010, or the Democrats will lose seats in the mid-term election. But most informed observers think that if present trends continue, the economy will not be in recovery by Election Day 2010. If the Republicans eat into what is now a bare working Congressional majority, you will face legislative gridlock. And the perception of a weakened presidency will become a reality — portending even worse political news for the president’s re-election in 2012.

Right now, the president has enlisted some Republican governors like Charlie Crist urging diehard GOP legislators to back his program. That’s a trifecta. It splits the opposition party, reinforces the perception of Republican obstructionism in Congress, and vindicates the president’s bipartisan overtures. Well done! But this will last only as long as President Obama’s program seems to be working.

As you must know, President Obama is at grave risk of getting on the wrong side of a populist backlash, which the Republicans — however improbably — will exploit. Regular Americans are losing savings, incomes and jobs, and see vast sums from bank rescues going mainly to bankers. A USA Today/Gallup poll published Monday shows that 83% of Americans favor federal aid to create jobs, 67% favor aid to states in financial trouble, and 64% favor relief to homeowners facing foreclosure. But only 39% favor aid to banks. I recently gave a speech to a blue collar audience, and one questioner asked why they didn’t just mail a check for $100,000 to every American family instead. Far fetched as that sounds, the seven trillion dollar cost about equals the direct and indirect costs of the serial bank bailouts (counting advances and guarantees from the Fed.) In days ahead, you will be hearing more of this on talk radio and cable TV.

You already grasp the need for better symbolism on this front. The limit on executive pay for top bankers getting federal relief is a good start. But the public expects a lot more. In the public mind, the bank bailout is conflated with the stimulus package; and what gets the publicity is the fact that the relief is going mostly to bankers, bank shareholders, and bondholders.

It did not help that Tim Geithner went on stage before his plan was ready for prime time. The plan laid an egg on Wall Street, but the financial market is not the only audience that matters. Geithner’s approach is also increasingly unpopular with ordinary people and with commentators. The fact that Geithner’s latest housing rescue also channels the relief through banks and bondholders, and solves only a fraction of the foreclosure crisis, does not help either.

The week that the 2008 election campaign locked in your favor, was, in retrospect, a very close call. That was the week of September 29, after candidate Obama had announced that even though the bank bailout bill was not perfect, he would support it. A large majority of House Republicans, meanwhile, refused to support the bill. Their mail and phone calls were running a hundred to one against the measure.

As you will recall, John McCain clumsily announced the suspension of his campaign and dramatically returned to the Senate, where he played no useful role whatever. When the dust settled, the White House rounded up just enough Republican votes over rank and file GOP opposition, and Barack Obama looked like a statesman while McCain looked like an inept opportunist. But had McCain behaved as a more adroit demagogue and played to the latent populism in the backlash against the bill, he could have been the net beneficiary while painting Obama as the “elite” agent of the banks. Given the close Republican alliance with Wall Street and McCain’s own prior record, the claim would have been preposterous, but politically it might have worked.

There will continue to be this sort of risk going forward. Republicans will posture as pseudo-populists. The administration’s emergency measures both need to cure the economic collapse — and to do so by symbolically and palpably siding with regular people.

With all of these alarms, there is still a lot that I find encouraging about the president’s actions in recent weeks.

President Obama’s event January 31 launching the task force on middle class working families chaired by Vice President Biden was superb, and the president’s remarks were spot on. Among other things, he declared:

We know that you cannot have a strong middle class without a strong labor movement. We know that strong, vibrant, growing unions can exist side by side with strong, vibrant and growing businesses. This isn’t a either/or proposition between the interests of workers and the interests of shareholders. That’s the old argument. The new argument is that the American economy is not and has never been a zero-sum game. When workers are prospering, they buy products that make businesses prosper. We can be competitive and lean and mean and still create a situation where workers are thriving in this country.

We have not heard language like that in the Oval Office since Franklin Roosevelt. And the Employee Free Choice Act, if enacted, would not just create a stronger labor movement but a stronger constituency for the Obama administration and future progressive electoral majorities. It puts the president on the side of working Americans.

I noted with great interest a most unusual front-page piece in the New York Times February 10, headlined, “Geithner Said to Have Prevailed on the Bailout.” In this piece, you and unnamed officials were quoted to the effect that Geithner had won the argument inside the administration against more severe executive pay limits and other tough conditions on banks receiving additional government aid.

What made this piece so interesting is that it deliberately publicized a split in a team famous for self-discipline and for never leaking anything about internal disputes. A blunter translation of the leak might be “You won that one and good luck, Tim, this baby is all yours.” I certainly hope that’s what you meant, because the baby is something of an orphan that nobody wants to claim. And if Geithner is not doing the job in a way that protects the public interest and the president, he certainly deserves to be isolated. Unless he improves on his performance to date, I would not be surprised if in six months, Geithner “decided” to resign to spend more time with his family.

It will be interesting to see whether the center-right economic team who took senior posts in the campaign and then got the top jobs in the administration learns how to get with a bolder program. If they don’t, it is up to the political team to re-educate them or to find people who get it right. I certainly hope you and the president are also talking to people who have a more radical view of how to fix the banking system, like Joe Stiglitz, Nouriel Roubini, Dean Baker, James Galbraith and Paul Krugman. The fact that people like Alan Greenspan and Sen. Lindsey Graham have said that bank nationalization might be necessary certainly gives the president some cover.

In early February, the president’s economic advisers came up with the idea of a White House summit on fiscal responsibility, which was held this Monday, February 23. The idea was to reassure fiscally conservative Blue Dogs and lay the groundwork for a “grand bargain” long promoted by Robert Rubin, Pete Peterson, and some in Congress to pay for the sins of emergency deficit spending this year and next by cutting back on Social Security and Medicare down the road. The preferred vehicle to bring this about was a bipartisan commission modeled on the base-closing commission. It would come up with a plan for automatic triggers for cutbacks in social insurance, and would be subject only to an up or down Congressional vote.

But someone failed to run the political traps. There was plenty of consultation with the Blue Dog Democrats and with some senior Republicans, but nobody thought to tell Nancy Pelosi or Harry Reid. Senior Congressional Democrats, among them Senate Finance Committee Chairman Max Baucus, who is nobody’s idea of a fiscal wastrel, warned the president that this was no time to be cutting back on Social Security and Medicare or putting government on bipartisan automatic pilot.

To his credit, the president changed the character of the White House summit, and preempted it with a budget briefing for reporters on the administration’s commitment to being the deficit back below three percent of GDP by 2013 — by letting the Bush tax cuts expire and by finding other revenue — not by gutting social insurance. Despite a lot of rhetoric about bipartisanship, the idea of a commission is off the table. Congratulations on preventing what might have been a political debacle and seizing the fiscal high ground.

It has been a real pleasure to see President Obama get out of the Washington bubble and get back on the road. His speech in Springfield, where the campaign began, marking the two-hundredth anniversary of President Lincoln’s birth, was one of his finest. And he articulated the themes that must be persuasive to Americans if he is to save the economy and his presidency.

In that speech, he challenged “the philosophy that says every problem can be solved if only government would step out of the way; that if government were just dismantled, divvied up into tax breaks, and handed out to the wealthiest among us, it would somehow benefit us all.”

And he added:

“Such knee-jerk disdain for government – this constant rejection of any common endeavor — cannot rebuild our levees or our roads or our bridges. It cannot refurbish our schools or modernize our health care system; lead to the next medical discovery or yield the research and technology that will spark a clean energy economy.

“Only a nation can do these things. Only by coming together, all of us, and expressing that sense of shared sacrifice and responsibility — for ourselves and one another — can we do the work that must be done in this country. That is the very definition of being American.”

I hope we hear a lot more of this.

Before the economy moves toward recovery, we will need a very different strategy for reviving a functioning banking sector — one rebuilds a simplified financial system to serve the real economy. The current approach is more about saving existing zombie banks, and the people notice. You can call it receivership or nationalization, but sooner or later the president will have to embrace it, and it is better done sooner.

We also need a plan to prevent foreclosures that goes directly to help homeowners, rather than hoping that by giving more incentives to banks and bondholders we can somehow induce them into passing along some relief — a plan that helps homeowners directly. I think the political team gets that. Either the economic team needs to get it, or you need to get a different economic team.

There is the further challenge of branding the practical help that the Obama administration is already providing. Franklin Roosevelt had the blue eagle of the NRA plastered in every store window. And when jobs came via the CCC or the WPA, nobody doubted who was the author of that help. For now, even though $780 billion is a lot of money, it passes through so many hands before it finally reaches local communities that it isn’t branded as help from President Obama. You are probably better equipped to figure out that one than I am, but it is another challenge.

In closing, let me say that during the campaign I wrote a lot of commentary, sometimes back-seat-driving what you were doing. Nine times out of ten when I second guessed your tactics, you were already several steps ahead of me. You’re a stellar political strategist. However, you now have the added challenge of governing, and of governing on the edge of a depression with a team of economic advisers that is sometimes more of an echo of the past than an asset. You don’t have much margin of error, and you need to get the politics right in order to get the economics right. We all need you and President Obama to succeed.