August 20th, 2016

Dear Presidential Candidates,

I founded SWIFT Act Alliance as a non-partisan 501 © 3 non-profit corporation, with the goal of raising awareness of economic fundamentals that explain the persistence of the Great Recession, while also providing a road map for permanent recovery.

The U.S. economy is in crisis, and unprecedented numbers of voters are rejecting the status quo.

What may be an inherent shortcoming of our political discourse is an excessive focus on short term consequences of what are portrayed as failings of the opposing party.  In contrast, the structural problems that plague our economy are of long duration and have been perpetuated by what I describe as the bipartisan consensus in Washington.

America in Decline
For example, consider the average rate of family income growth in two distinct periods:
• Between 1947 and 1979, for the bottom 80 percent of families, the rate of income growth averaged 2.4% per year.
• Between 1979 and 2007, for the bottom 80 percent of families, the rate of income growth averaged 0.5%, or one half of one percent per year.

In the later period, average family income, for the bottom 80 percent of families, grew at a rate nearly 80% slower than in the previous period.

The magnitude of that decline is even more extraordinary when you consider that in the earlier period, family income was based overwhelmingly on single income households. Women only entered the paid workforce in large numbers in the later period. Yet, despite the transition to two income households, the bottom 80 percent of families experienced an 80% decline in the growth of annual income.

Furthermore, the statistics that show this extraordinary decline reflect the 28 year period prior to the financial crisis of 2008.

The cause of the decline can be found in different characteristics of the economy in each period.

Between 1947 and 1979, the economy was based on manufacturing. Economic value added is far greater in manufacturing than in any other sector of the economy. Manufacturing employment also has by far the greatest impact on employment in other sectors, both in services and in supply chains that support manufacturing.

Between 1979 and 2007, the economy was gutted by offshoring. Most damaging was the explosion of offshoring that followed currency devaluations throughout Asia in 1997, the U.S. granting of Permanent Normal Trade Relations to China in 2000, and China’s entry into the World Trade Organization (WTO) in 2001.

For example, between 1998 and 2010, the U.S. lost 6 million jobs in manufacturing. Manufacturing job loss of 6 million also brought the loss of an additional 10 million jobs in supply chains, and another 7 million jobs from the loss of re-spending (workers spending their paychecks) throughout the economy.

These figures combined total 23 million jobs.

The majority of our politicians, regardless of party, rely on claims that the U.S. is undergoing a transition to a service economy, and that the loss of jobs in manufacturing has been offset by job gains in service sector occupations. However, there is no factual basis for such claims, as data on unemployment has clearly shown.

For example, in July 2012, the Labor Department’s broadest measure of unemployment (U-6) was reported at nearly 23.4 million unemployed. That figure supports the calculated total loss of 23 million jobs (1998 – 2010) outlined above.

By July 2015, the U-6 figure was reported at only 17 million unemployed, equivalent to 10.8% of the labor force. Even so, a 2015 Gallup survey showed 16% of respondents did not have enough money to feed themselves or their family. The conclusion is that not only are there not enough jobs, but many of the jobs being counted in the statistics don’t pay enough for people to feed themselves or their families.

The number of people on food stamps reached an all-time high in 2013, and was still more than 45 million people in 2015.

By July 2016 the U-6 figure was reported at only 16 million. Even so, in 2016 there were 900,000 more people 65 and older who were working than there were in 2008. When elderly people can’t afford to retire and take part time jobs, they get counted in the statistics and make the official figures on unemployment lower.

The reality is the economy has been gutted by offshoring, and can no longer create enough jobs. That means not enough jobs created, but also not enough jobs that pay well enough for people to feed themselves and their families, and not enough jobs that can fund retirement for people 65 and older.

The simple reality is that banks are not factories. Manufacturing creates millions of jobs, whereas banks don’t. An economy based on finance can’t create enough jobs, while the jobs that are created don’t pay as well as the manufacturing jobs that have been lost.

Whereas between 1947 and 1979 the economy was based on manufacturing, between 1979 and 2007 the economy was gutted by offshoring, and transformed into a New Economy based more on finance than production.

With the loss of manufacturing, despite the fact that in the later period women entered the paid workforce and family income came to depend overwhelmingly on two income households, the rate of annual income growth, for the bottom 80 percent of families, declined by 80%.

President Obama did not address the extraordinary contrast between these two periods in our history in his State of the Union address. Instead, he said “Anyone who claims that America is in decline is peddling fiction.”

It is without argument that President Obama inherited an unprecedented financial crisis when he entered office. Even so, the President has the unfortunate habit of referring to economic conditions in 2008 as his benchmark for evaluating recovery in the Great Recession.

In contrast, long term data show that for the bottom 80 percent of families, the Great Recession began in the 1980s, and has continued to the present day.

Political Disconnect
Here then, is the #1 problem for voters. The elephant in the room is the fact that
• the economy has been gutted by offshoring and can no longer create enough jobs, and
• the majority of politicians in both parties want to put lipstick on that pig and make it fly.

What is critical is simply that offshoring is not trade. The media and the political establishment have framed the issue as being about the benefits of “trade.” “Trade” describes making things in this country that we sell to other countries, and vice versa. For example, we make things in American factories and sell them to France. People in France make things in French factories and sell them to America. That’s TRADE.

In contrast, offshoring is not trade.

Offshoring involves
• Shutting down American factories,
• Re-building those factories in low wage countries overseas, and
• Selling low wage products back across the border, to American consumers.

We lose our factories, and our high paying jobs and our pensions, and in return we get cheap imports made with low wage labor.  Clearly, offshoring is not trade. Arguments that promote the benefits of trade are irrelevant, because offshoring is not trade.

What we hear is a big lie. What we hear is that the deindustrialization of America has been caused by a “natural” process of globalization. Globalization is the process of spreading manufacturing technology around the world. But the fact is, globalization is only 10% natural. The other 90% is political.

There has been a natural process, driven by lower transportation costs and digital communication through the internet, which makes it possible to produce manufactured goods in low wage countries. That natural process might make up 10% of what we call globalization.

The other 90% is offshoring. It is offshoring that has spread manufacturing technology around the world.

For example, consider what the demand might otherwise have been for super high speed internet connections in low wage countries. Clearly, high speed internet isn’t required to harvest crops. Instead, the spread of high speed internet has grown in tandem with the offshoring of manufacturing by U.S. multinational companies.

The deindustrialization of America was not caused by some “natural” process of globalization. In fact, the deindustrialization of America came about through an overtly political process, in which bipartisan consensus in Washington has promoted financial deregulation and corporate offshoring.

Wall Street Rules
Since the 1980s, a lack of financial regulation, and the doctrine of shareholder value have transformed the economy. The idea behind shareholder value is that a high stock price is the only thing that matters.

CEOs have been paid, through the granting of stock options,
• To downsize, by reducing the number of employees,
• To sell off large workforce lines of business, and
• To move manufacturing offshore, to Mexico, China, or other low wage countries

This formula serves to raise the stock price for the companies involved. CEOs cut spending on Research and Development. And instead of investing in manufacturing, they invest in buying back company stock, because that makes the stock price go up.

For corporate spending overall, from 1970 to 1979, every dollar spent on productive investment in plant and equipment, was matched by $1.30 spent on financial investment. But from 1979 to 2007, every dollar spent on productive investment in plant and equipment, was matched by $27 spent on financial investment.This change shows how Wall Street has had a corrupting influence, even on non-financial business.

The investments that have been made in manufacturing, have been made in low wage countries overseas. Consider that between 1964 and 1984 domestic corporate investment averaged 4% of GDP each year. Over a long period the level of domestic investment has declined, and since 2005 has averaged just 2.1% of GDP each year.

Since the mid-1980s, the value of that investment gap has grown to more than $4 trillion dollars. In the same period, U.S. corporate investment overseas increased by $4.9 trillion.

In sum, the deindustrialization of America has been driven by the granting of stock options to CEOs.
For U.S. multinational companies
• Low wage labor drives higher profit,
• Higher profits mean higher stock prices,
• CEOs offshore production to low wage countries to raise profits,
• CEOs cash in stock options for tens if not hundreds of millions of dollars

That’s the formula for the New Economy, in which the rate of annual income growth, for the bottom 80 percent of families, declined by 80%, before the financial crisis of 2008. And this New Economy is an economy that New Democrats and Neo-conservative Republicans have done nothing but promote.

The Wall Street / Trade Complex
Wall Street’s takeover of American business was the consequence of deregulation embraced by both political parties. Wall Street and U.S. companies with offshore production have made hundreds of billions of dollars in profit from moving manufacturing to low wage countries.

This Wall Street / Trade complex is in outright collusion with China to steal American manufacturing technology. That’s why the U.S. Chamber of Commerce funnels millions of dollars in campaign contributions from secret donations to promote offshoring.

The U.S. economy has been destroyed by Wall Street’s promotion of offshoring and speculation, which is perpetuated through bipartisan consensus in Washington.

The share of the economy accounted for by the financial sector is now nearly double what it was in the 1980s. Corporate profits are at the highest levels on record, with foreign and financial profits accounting for an average 50% of the total since 2001.

While low wages contribute to record profits, low wages also mean there is too little domestic demand to justify investment, and too little domestic investment to increase hiring.

The problem with our economy has nothing to do with the differences between liberals and conservatives. The problem with our economy has everything to do with bipartisan support for a globalist agenda that promotes offshoring and the deindustrialization of America. Wall Street and U.S. companies with offshore production profit from the trade deficit, while the voters pay the price with high unemployment.

Bipartisan Pro and Con
Many have been struck by the intense opposition to offshoring through so-called “trade” deals among both Trump and Sanders voters, because those two candidates are on opposite sides of the liberal/conservative divide.

What is remarkable is the lack of news covering bipartisan opposition both to trade deals that promote offshoring, and to the on-going bail out of Wall Street banks through the purchase of toxic assets by the Federal Reserve.

The public may be only marginally aware of Paul Craig Roberts, who was undersecretary of the Treasury in the Reagan administration, and has long been a leading critic of offshoring. Former Reagan speech writer and presidential candidate Pat Buchanan, also a vehement opponent of offshoring, was previously a commentator on MSNBC but has also been conspicuously absent from news coverage of the primary.

In 2013 the Fed allocated $75 billion a month to buy toxic assets from the banks, followed by another $30 billion a month in 2014. These asset purchases aren’t part of the annual budget, and are rarely the subject of political reporting.

Along the same lines, there has been bipartisan support for legislation that goes beyond the limited reform that has fallen short of breaking up the banks, which also suffers from serious under-reporting by the media.

In 2012 Sherrod Brown (D-OH) re-introduced the Safe, Accountable, Fair& Efficient (SAFE) Banking Act. The Act was designed to prevent future bailouts by imposing size limitations.

The SAFE Banking Act was supported by former Federal Reserve chairman Paul Volcker and ranking Republican Senate Banking Committee member Richard Shelby. Other supporters included former Bush appointed chair of the FDIC Sheila Bair, and Thomas Hoenig, FDIC board member and former president of the Kansas City Federal Reserve. Others included four Federal Reserve Bank presidents – Richard Fisher of Dallas, Esther George of Kansas City, Charles Plosser of Philadelphia, and Jeffrey Lacker of Richmond.

What seems odd is that television news coverage, across the political spectrum, gives the impression that the only one who wants to break up the banks is Bernie Sanders.What is hardly mentioned is that James Pethokoukis of the American Enterprise Institute, Reagan budget chief David Stockman, and former Republican Governor John Huntsman are among many other conservatives who have also expressed support for breaking up the banks.

When prominent conservatives and six current or former federal reserve regional bank presidents support breaking up the largest banks, why are we still having this conversation? It is hard to avoid the conclusion that Wall Street contributions to political campaigns have had enough influence in congress to retain the majority of votes needed to prevent reform.

Who could argue with unprecedented bipartisan support among those with by far the most expertise to understand the threat from banks that are too big to fail? The need to break up the banks should be beyond debate.

After the SAFE Banking Act failed to pass, the Glass Steagall Act for the 21st century was endorsed by Bernie Sanders, Elizabeth Warren, and John McCain. While here again there has been bipartisan support for the bill, the new Glass Steagall Act is not as strong a bill as the SAFE Banking Act, because SAFE would impose size limitations, whereas the new Glass Steagall bill would not.

The Non-partisan Imperative
We owe $19 trillion dollars, soon to be $21 trillion. We will expand the tax base, and pay down the debt.
The dollar will lose its status as international reserve currency, dollar devaluation in the range of 50% will follow, and there will be inflation in the range of 100% on everything we import.

The reason is because as our national debt rises and our inability to pay it off becomes more and more evident, investors will lose confidence in the dollar.

An interim result might be a sudden rise in the interest rate on money provided through foreign investments we use to finance the budget. But ultimately, if nothing is done to change our current trajectory, the dollar will lose its status as international reserve currency.

Without a dramatic rise in taxes, the only way to increase revenue is to expand the tax base. And the only way to expand the tax base is to do whatever it takes to bring back American manufacturing.

It would be foolish to think there might be one set of options available to a Republican administration, and a different set of options available to a Democratic administration.

Regardless of how anybody might feel about it, the only option for the next administration is just what I’ve outlined above.We will expand the tax base, or the U.S. economy will come to look like that of Detroit. It isn’t any more complicated than that.

In sum, there are two existential threats to our country.

First, to paraphrase Paul Craig Roberts, offshoring represents a greater threat than terrorism. Thanks to offshoring, this country’s manufacturing base has been sent overseas. And both the value added and the jobs associated with that production have been lost. The economy has been gutted by offshoring, and can no longer create enough jobs.

Second, there has been no reform that would require
• Separation of commercial banks and investment firms,
• Repeal of federal deposit insurance for derivatives, and
• Congressional approval for the Federal Reserve to purchase toxic assets from banks.

Without meaningful reform, the next financial crisis that requires government bailout has the potential to bankrupt the Treasury.

Here then, are the two requirements of the non-partisan imperative.
• Bring back American manufacturing to expand the tax base and pay down the debt, and
• Enact financial reform that includes breaking up the banks, ending deposit insurance for derivatives, and requiring Congressional approval for the Fed to purchase toxic assets from banks, to prevent future bailouts that could bankrupt the Treasury.

SWIFT Act proposals are consistent with this imperative, and are shown in our petition.

Sincerely yours,

Buck Marshall
SWIFT Act Alliance

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