 
### Growth and Decline of the Economies

### of Europe and the US

Published by Bhaskar Sarkar, at Smashwords

Cover art: Sarita Sharma

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Copyright Author Bhaskar Sarkar 2012

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Dedication

This book is dedicated to students and teachers of economics in the developed world.

May God give them the wisdom to find an alternative to neo-liberal capitalism and save the world

Contents

Prologue

Chapter 1: Economy and Wealth of Nations

Chapter 2: Economic Growth and Decline of Europe

Chapter 3: Economic Growth and Decline of United States

Chapter 4: Impoverishing Nations

Chapter 5: Impoverishing the People

Chapter 6: Bonanza for the Rich

Chapter 7: Causes for the Decline

Chapter 8: Strategy for the Future

Epilogue

Bibliography

About The Author

**Prologue**

".... _You don't need an economist or the Federal Reserve to tell the American people that the economy is in trouble because they have been experiencing it for years now... We have to stop giving tax breaks to companies that are shipping jobs overseas and invest those tax breaks in companies that are investing in the US,_ "- Barack Obama, American Democrat President in waiting at a debate at University of Texas, Austin on Thursday 21 February 2008.

About four years have passed since Barack Obama became the President of United States. But the world economic situation is still grim. The decline in the economies of the United States and much of Europe is not a figment of the imagination of the Author. Government debts are soaring. GDP growth is stagnating. Unemployment is stubbornly refusing to comedown. Poverty and inequality levels are rising. Goldman Sachs is now predicting that the largest developing economies namely Brazil, Russia, India and China also known as the BRIC will overtake G7, the seven largest economies of the developed world, in size of their economy. (Briefings; Time Magazine April 4, 2011). Fareed Zakaria, the well known author, TV anchor and correspondent has written the book, "The Post-American World".

On September 15, 2008, ahead of the collapse of the over 150 year old investment bank, Lehman Brothers, Alan Greenspan, the head of the Federal Reserve admitted that the US economy was facing its worst crisis in a century. A 2008 report by the Federal Reserve showed that household net wealth in the United States fell for the first time in five years in the fourth quarter of 2007, dropping $532.9 billion or 3.6 percent,. The collapse of real estate prices accounted for a third of the decline, while the decline in value of financial assets like stocks, bonds and mutual fund investments accounted for nearly half. By October 2008, with the stock market loosing 20% in one week, with stock prices hovering at about half their 2007 peaks, after 23 banks and some Fortune 500 companies having gone bankrupt, everyone was ready to admit that there was a crisis in the US economy. Today, in the second half of 2011, the economic situation in the United States and Western Europe is as grim if not grimmer.

But it was not always so. The 1950s and 1960s was characterized by great economic prosperity in the United States. Economic growth was high and inflation was contained. Distribution of wealth was reasonably fair and the rich poor divide was not as much as it is today. There was a substantial and prosperous middle class. Then 1973 and the years that followed brought in a variety of fiscal problems. The US dollar weakened and the US had to leave the "Gold Standard". There was an oil crisis in 1973 and energy crisis in 1979. There was increased accumulation of capital in the US. Unemployment began to rise. Inflation or stagflation was increasing. A number of theories concerning new economic systems began to develop. There was extensive debate between those who advocated "social democracy and central planning" and those recommending "liberating corporate and business power and re-establishing market freedoms". By 1980, the pro corporate group had emerged the winner. The global economic system that they created would become known as "neo-liberalism".

The other day I was listening to a program on CNN on the US Economy. The anchor was very clear that when US government and politicians discussed the US economy, they tended to approach the problem from statistical approach rather than a peoples approach. Thus measures which benefit the super rich and the American companies or which projected a rosier statistical picture, rather than those which benefited the American people are usually given more weight age. No one seems to be clear as to why the economies are not reviving. The debate in the Congress is limited to reducing deficit and perpetuating the "Bush Tax Cuts" and increasing stimulus to create employment and increase tax on the rich. The debate in the academic world does not seem to cover any new ideas. Every one seems to recommend more of neo-liberal capitalism and globalization with minor differences.

This book seeks to examine some historical facts regarding the rise of the economic power of Western Europe and the United States and the causes of the decline of the economic power. It is also an appeal to the professional economists and academicians to halt the march of neo-liberal capitalism and globalization unleashed by President Ronald Regan in 1981 and followed by all his successors to date with disastrous results for the US and the developed world. These economic doctrines, which impoverish the majority of the people of the developed world while benefiting the American companies and the super rich, are economic policies which will finally end peace and prosperity in the US, Britain, Europe, and this world. The fact that the British Economy is at a 60 year low is no coincidence. British Prime Minister Mrs. Margaret Thatcher, a contemporary and confidante of Ronald Regan, introduced the same economic liberalization in UK at about the same time.

The book is also an appeal to the professional economists and academicians to re-examine the forgotten economic theory of "Mercantilism" and see if it can revive the fortunes of the United States and the developed world. It is also an appeal to the economists of the developed world to find an alternative to neo-liberal capitalism and globalization which are impoverishing the governments and ordinary people of the developed world.

The Author

Back to Contents

Chapter 1: Economy and Wealth of Nations

" _I would like to read what John McCain has to say about honor. Both my husband and I have been laid off and we cannot afford to buy his book to find out_ " - Zulia Zulich, Rancho Cucamonga, California, US, In Box, Time Magazine, September 29, 2008

Before we discuss the rise and fall of the economies of the developed world and how the economies can be revived, it may be appropriate to spend a few minutes to define the meaning of the economy of a nation and its wealth. Is the economy of a nation a set of impersonal statistics like GDP, GDP growth, per capita GDP, consumer confidence or Dow Jones index? Or does the economy and wealth of a nation mean the ability of the government to spend money to wage war and to provide aid to other countries or protect greedy investors and bailout the private sector banks and financial institutions which are on the verge of collapse? Or does it mean the prosperity of the limited companies and business houses of the nation, their assets and profitability or the wealth and prosperity of the super rich or the upper class of the world that are getting wealthier by the minute? Or does it mean the wealth, well being and prosperity of majority of the people of the nation?

If the economies of nations mean the ability of the national governments of the developed nations to spend, the economies are perhaps fine. Governments can borrow or print as much money as they want. The developed countries have been doing just that since 2000 and funding wars in Iraq and Afghanistan and providing assistance to favored countries like Israel, Pakistan, Ethiopia, and Georgia to name a few and running up huge trade and budget deficits. These Governments can also spend trillions of dollars of taxpayer's money to bail out banks and investment banks which are going bust because of their greedy and unsound credit and investment policies which the governments failed to regulate. If the economy means the prosperity of nations multinational companies and the super rich, then they are doing better. They have been able to stash over a trillion dollar of profit offshore at tax havens to avoid paying their legitimate share of taxes. There is no doubt that a few Wall Street icons, over 100 year old Fortune 500 companies, may have collapsed. But that has happened before in 1979, 1982/83, 1988, 2000/03 and 2008. The super rich are doing fine. The world had 1210 billionaires in 2011, an increase of about 200 over 2010. Of the 1210, 713 were from United States and Europe and 330 is Asia. But if by the economy of nations we mean the economic condition of majority of the people, it is bad and getting worse by the day every year since 2000. Unemployment is increasing and is at unprecedented levels in Western Europe. Poverty is increasing. Savings of many thrifty and prudent citizens have disappeared with the collapsing financial giants. Most sixty plus citizens of the developed world are resigned to defer retirement as much of their retirement plans have gone sour and are resigned to a life of penury after retirement.

Economy

An economy is defined as the total of all human activity including producing, exchanging, distributing, and consuming goods and services inside an economic system. The economy of a country consists of all economic activity in its economic system. An economy may also be described as a social network where goods and services are provided or exchanged according to demand and supply between participants by barter or on payment with currency accepted within the network. A given economy is the end result of a process that involves its technological developments, history, social organizations as well as its geography, endowment of natural resources and ecology.

An economic system is composed of people and institutions. It is governed by rules, and relationships between the people and the institutions. Laws regarding sale, lease or mortgaging property are example of rules. The organizations like central governments, state governments, central banks, banks, stock exchanges, courts, corporations etc are examples of institutions. Relationships include the relations between the employee and employer, banks and their creditors and debtors, corporations and governments and the vender and the consumer etc.

The people of the country may be divided into classes. Adam Smith divided the population into owners of resources (labour, land and capital) and labour. Another way of dividing the population could be by income. Thus we have the rich, the middle class and the poor. One percent of the worlds wealthiest have 40 percent of the world's wealth. Another way of dividing the population is to classify them as the privileged and under privileged. The wealthy are naturally privileged. The privileged also include politicians, senior officers of public and private institutions and well educated professionals. The poor are naturally under privileged. The under privileged also include ethnic and religious minorities, immigrants, refugees etc.

Institutions can be public or private. Public institutions are created by governments to provide essential services, maintain law and order and to protect the country from external threat. Public institutions like hospitals or schools are set up and run with public money or taxes paid by the taxpayers. They may charge fees for services provided and partly or fully fund their activities. Private institutions like manufacturing units, banks, hospitals, and hotels on the other hand are set up by owners of resources. Their primary focus is to generate more and more profit and wealth for the owners and share holders.

Wealth of Nations

What constitutes wealth of nations? Unfortunately, there is no universally accepted definition of wealth of nations. To a lay man, individual wealth consists of money (cash), valuable possessions like gold, gems and jewelry, land and buildings, and stocks, shares, bonds, debt and other modern investments. In case of nations, wealth is more difficult to define. Some may include the wealth of its people, its institutions, foreign exchange reserves etc. Some may like to add its natural and manpower resources. Some may restrict it to the wealth of its central government. The wealth of nations or individuals is constantly changing. However, it is interesting to note the various nuances of wealth.

Cash or Legal Tender

The first and foremost part of the wealth of a nation is its cash. All countries have printed or issued a certain amount of currency and coins. Most of it is held within the country but some of it may be held outside the country as foreign exchange reserves. The total money in any economy is held at different places.

Cash is that amount of currency that is physically available with individuals and institutions and not deposited in any bank. In developing countries like India where parts of rural population do not have access to banks, cash constitutes a larger percentage of the total currency in the economy. Cash is used for day to day expenditure. Cash is also used for smuggling, trading in narcotics, bribing, funding political parties etc. Cash is also used in transactions to avoid paying VAT and other taxes.

Money is also held with central banks of countries. Money is held with banks in the form of savings or demand (current) deposits. This money can be withdrawn from the bank at short notice. Money is also held as Term Deposits or fixed deposits where the money is locked in for a specified period.

Money is essential for survival. It enables us to buy goods and services that we need or that we want. When we have more money than what we need and want, we have an investable surplus. Thus capital is formed. This capital can remain deposited in banks or be used for producing goods and services or for speculation. When it is used for producing goods and services, we generate employment and profits. When capital is used gainfully for speculation, it does not generate employment but more capital. When there is more capital than what can be invested in goods and services we have a serious problem. When we have too much money chasing too few goods and services, we have inflation. When we have too much money chasing too few speculative or investment opportunities in stocks, shares, debt, property, commodities etc, we have bubbles. When these bubbles burst, there is a financial meltdown.

A dollar currency note or coin remains a dollar over the years. But its purchasing power is always changing. Most of the time, the purchasing power of money within a country keeps reducing due to rise in prices of goods and services or inflation. To compensate for the rise in the cost of goods and services, incomes have to be increased.

When money is used for purchasing goods and services from outside the country, an exchange rate comes into play to convert the currencies of the importer and exporter countries. The purchasing power of a currency may increase in a foreign country if the currency of the foreign country is devalued. The converse is also true. Exchange rate of currencies is one of the reasons for the so called wealth of developed nations. One US dollar is equal to about 55 Indian Rupee or 6.39 Chinese Yuan. The exchange rates are constantly changing. There is no mathematical logic behind these figures. The exchange rate is supposed to be determined by demand and supply. However, in many countries like India and China, the exchange rate is totally or partially fixed by the government to suit its trading requirements. To illustrate the point let us compare the GDP of United States and China. The GDP of the United States in 2010 was about 14.6 trillion dollars US. The GDP of China in 2010 was 5.87 trillion dollar US. Thus if China changed its conversion rate from 6.39 Yuan per dollar to 2 Yuan per dollar, it would immediately become the largest economy in the world.

Gold, Precious Metals and Stones

The second part of the wealth of a nation is gold and precious stones and precious metals. Their value tends to constantly rise over the years. In 1971 the price of one oz of gold was US $40. In September 2011 it rose to over US $ 1900, an over 47 times increase in 40 years. The prices of gems and other precious metals have also been increasing though the increase is not uniform or comparable with gold.

Land and Property

The third part of wealth comprises of land and property. Price of land has been increasing all over the world. There may be short term fall in prices of land after financial meltdowns but the prices rebound within 10-15 years. In rare cases, specific portions of land may see a reduction in value due to ecological degradation or political unrest. However, the cost of the building itself usually reduces due to aging or due to damage in natural disasters.

Stocks, shares and other financial instruments

The fourth part of wealth is stocks, shares and other financial instrument. Their value is always fluctuating and unreal. They have a face value, a book value and a market value. It is this so called market value that is used to calculate the value of ones holding of stocks, shares and other financial instrument at any given time. The market value changes by the minute. When the markets crashed in 2008, the total value of the stocks reportedly fell by about 35 trillion US dollars. Stocks, bonds and other financial investment instruments can become junk or valueless if the company or bank collapses or is declared bankrupt. It will thus be seen that wealth represented by stocks, shares and other financial instruments are unreal. The "market capitalization" figure or the value of all stock of companies listed in a stock exchange is a meaningless figure. The sum can never be realized because stocks and shares are converted to real money only when they are sold and any large sale reduces the price.

Other Resources

Some like to include natural resources like deposits of coal, crude oil, natural gas, metals, precious metal and gems, hydro-electric power generation potential etc into the wealth of nations. Some would want to include manpower resources or technological excellence in wealth of nations. Some may want to include tourist earning potential into wealth of nations. But the value of these resources is difficult to quantify and best ignored while assessing the wealth of a nation.

Holders of the Wealth of Nations

Wealth of nations are held by four entities, the Central Government, Governments of its states/counties/provinces, its institutions, and its people.

Central Governments

The wealth of Central Governments consist of money collected as taxes, its reserves of domestic money and precious metal held with its central bank, money given as loan to foreign governments, money invested in bonds of foreign countries and foreign exchange reserves. The financial state of the central governments of developed countries is poor. Their government debts are huge and range from about 70 to 200 percent of GDP.

Governments of States /Counties/Province

The wealth of Governments of States/Counties/Province consist of lands and property in its possession, money collected in taxes and money received as grant from the central government and deposited in banks or state treasuries. Finances of most of these governments are usually in dire state.

Institutions

The wealth of the institutions consists of the cash, properties and investments. The first two are real. The value of investments, as we have seen, keeps changing with time.

People

The people of a nation also hold a part of its wealth. The people may be further divided into the privileged class, the middle class and the poor and under privileged. In most countries the wealth of the top one percent of the population is equal to the wealth of the bottom 40 to 60 percent of the population. This inequality in the distribution of wealth is not destabilizing as long as the poor and under privileged have enough money to meet their basic needs of food, shelter and education that enable them to live in their traditional life styles.

Measuring Economy

How do we measure the size of an economy? Do we measure it by its GDP, by the level of Public Debt, by the exchange rate of its currency, the current account deficit, the trade deficit, stock market performance, industrial output, agricultural output, the number of billionaires they have, the real income of the people, the unemployment levels, the poverty levels or levels of economic disparity. The assessment will naturally depend on the yardstick used. The most common method used is to measure the countries GDP in US dollars (PPP). The figures are calculated annually by World Bank and a few other organizations. The measurement by GDP has serious shortcoming which we will discuss in Chapter 4.

Measuring Wealth of Nations

Measuring the wealth of nations is equally problematic. Most countries do not declare the total currency that is in circulation in the economy. The gold and foreign currency reserves of countries may be in public domain but there is no way of knowing the quantity and value of gold, silver, gems and jewelry held by the people of a nation. Comparing wealth of nations involves use of currency conversion rates which are often manipulated to suit the requirements of the governments, World Bank or IMF.

Conclusion

It is the author's opinion that much of the economic crisis that seems to engulf the United States and Europe is because we are so much taken in by economic theories and so busy manipulating economic policies and activities to suit different interest groups that we seem to forget the basics. Some thoughts which the learned readers may like to ponder on are:

Real wealth consists of money (currency and coins), land, gold, silver, gems etc. Like matter, real wealth cannot be destroyed. It only moves from one individual, institution or country to another. Unreal wealth in the form of shares, bonds, derivatives and other financial instruments, on the other hand, can loose its value overnight during stock market crashes and financial meltdowns.

Demand at any given time is finite. If one American consumes one kg of meat a day, the total monthly requirement for a population of 300 million will not exceed 9 billion kg. If more is available in the market, some of it will remain unsold. The same is true for all goods and services.

When there is more capital in an economy than what can be used to purchase or invest in goods and services we have a serious problem. When we have too much money chasing too few goods and services, we have inflation. When we have too much money chasing too few speculative or investment opportunities in stocks, shares, debt, property etc, we have bubbles. When these bubbles burst, there is a financial meltdown. Excessive liquidity or money supply is a greater threat to the stability and wellbeing of mankind than nuclear weapons, pandemics and terrorism because it puts necessities of life, particularly food and housing beyond the reach of the poor and the underprivileged. These people constitute 60 to 80 percent of the population of countries. This is bound to lead to social unrest in the long run.

The value of wealth of nations, institutions and individuals are constantly changing. If you do not know how to hold on to real wealth, it will move to some other country, institution or individual.

Back to Contents

Chapter 2: Economic Growth and Decline of Europe

It is generally accepted that at the beginning of the 18th Century, the level of prosperity in the nations of Asia and Europe was more or less the same. But by 1950, the situation had completely changed. Per capita income of the people of Western Europe was 20 to 30 times that of countries of Asia and Africa. It is thus natural for intellectuals, economists and even the people of the developed world to claim that these countries became wealthy due to their superior innovativeness and economic policies which enabled them make more effective use of resources namely land, labour and capital and pull economically ahead of the rest of the world. However, as we shall see in this chapter, this claim is largely unsubstantiated.

Economic History of Europe

The decline of feudalism in Europe leading up to the French Revolution had a profound effect on the European economy. Isolated feudal estates were replaced by centralized nations as the focus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade. Growth of specialized education in Europe in the 12th Century gave rise to economic theories and brought in concepts of national economies and state intervention into trade and economic policies. The new economic policies had a profound effect on the prosperity and economic power of Europe.

The Elizabethan System

England was the first European nation to begin a large scale and integrated approach to trade. This was during the reign of Queen Elizabeth I (1558–1603). The concept of national balance of trade first appeared in an article, "Discourse of the Common Wealth of this Realm of England," in 1549. The article stated that "We must always take heed that we buy no more from strangers (other countries) than we sell them, for so should we impoverish ourselves and enrich them." New markets had to be developed to sell more. The economic theory also required cheaper imports. This prompted the court of Queen Elizabeth to develop a naval and merchant fleet capable of challenging the Spanish stranglehold on trade with North, Central and South America. Queen Elizabeth enacted the Trade and Navigation Acts in Parliament and ordered the British navy to protect and promote of English shipping.

Mercantilism

The economic theory of "Mercantilism" was further refining of the Elizabethan System. Mercantilism arose in France in the early 16th century, soon after the monarchy had become the dominant force in French politics. The French government became deeply involved in the economy in order to increase exports. Protectionist policies were enacted that limited imports and favored exports. Industries were organized into guilds and monopolies, and production was regulated by the state through a series of over a thousand directives outlining how different products should be produced. In 1539, France banned the import of woolen goods from Spain. A number of restrictions were imposed on the export of bullion. To improve industry, foreign artisans and craftsmen were brought in. French government also took steps to decrease internal barriers to trade, reducing internal tariffs and building an extensive network of roads and canals. These policies were quite successful. France's industrial output and economy grew considerably during this period and France became the dominant European military power. France never developed a strong navy and never became a major trading power. Britain and the Netherlands remained supreme in the trading field.

In England, Mercantilism reached its peak during the Long Parliament Government (1640–1660). Mercantilist policies were also embraced throughout much of the Tudor and Stuart reigns. In Britain, government control over the domestic economy was far less extensive than on the Continent. Government controlled monopolies were common. British mercantilism was mainly restricted to efforts to control trade. A wide array of regulations was put in place to encourage exports and discourage imports. Tariffs were placed on imports and bounties given for exports. The export of some raw materials was banned completely. The Navigation Acts expelled foreign merchants from England's domestic trade. The nation aggressively sought colonies and once under British control, regulations were imposed that allowed the colony to only produce raw materials required by Britain and to trade only with Britain. This led to friction with the colonies in North America and was one of the major causes of the American Revolution. The Mercantilist policies turned Britain into the world's dominant trader, and an international superpower.

The other nations of Europe also embraced Mercantilism to varying degrees. The Netherlands, which had become the financial center of Europe by being its most efficient trader, had little interest in seeing trade restricted and adopted few Mercantilist policies. Mercantilism became prominent in Central Europe and Scandinavia after the Thirty Years War (1618–1648). Prussia under Frederick the Great was perhaps the most rigidly controlled economy in Europe. During the economic collapse of the seventeenth century Spain did not have a coherent economic policy.

Mercantilism also fueled the establishment of European colonies around the world. Each European nation attempted to seize colonies that would be sources of raw materials and exclusive markets. This expansion was often conducted under the aegis of companies like the British and Dutch East India Companies or the Hudson Bay Company with government guaranteed monopolies in a certain part of the world. Though Mercantilism has been criticized by economists like Adam Smith and economic liberalization is made out to be economic concept of our time, the countries of the world continue to fight each other for access to raw materials and exclusive markets. Mercantilism is now practiced by large developing countries like China, India, Brazil etc who are strong enough to resist the pressure of the developed countries to "Globalize" the economy by removing trade and investment barriers and reducing import duties.

Growth of Economic Institutions

Economic institutions like banks, limited companies and stock exchanges first made their appearance in Europe. Evolution of banks was perhaps the most important development in the growth of financial institutions. Before banks appeared on the scene, credit requirements of businesses, individuals and even the kings were met by money lenders who charged steep interest for the money lent. However, there was the problem of safe keeping of surplus cash. In England such funds were kept with reputed goldsmiths who even paid interest on the money given to them for safekeeping. Banks evolved to meet these two requirements. The bank held cash for customers, lent money and discounted bills of exchange. They paid interest on the cash deposited; collected interest on funds lent and charged a fee for discounting bills of exchange. The first bank to be established in Europe was an Italian bank at Venice in the 12th Century. The Amsterdam Bank in Holland was established in 1609 and it had benefited Dutch commerce tremendously by enabling companies and individuals to raise money when required. In 1694, while England was at war with France, the English Government became desperately short of money. The Stuarts had defaulted on their loans so often that the Treasury found it difficult to raise money. In desperation, King William and his ministers allowed a group of wealthy people to form a public bank. In return the bank agreed to give the Treasury a loan of 1,200,000 pounds. The Bank of England was thus founded by an act of the Parliament in 1694. Along with the banks came currency notes. Initially, bank notes were hand written with a face value of at least 20 pounds. Notes of 1 and 2 pounds were introduced in 1797. Banks contributed immensely to the growth of European commerce and prosperity by providing large funds for commercial ventures which individual money lenders might have found difficult.

The second most important development was the evolution of joint stock companies. Proprietary and partnership business had always been there. A joint stock company is a company or business organization involving two or more individuals that own a part (share) of the capital or investment (stock). Certificates of ownership called "shares" are issued by the company in return for financial contribution. The shareholders are free to transfer their ownership interest in the company at any time by selling their shareholding to others. In modern company law, the company possesses a legal personality separate from shareholders. The shareholders are only liable for the company's debts to the value of the money they invested in the company. Today joint stock companies are commonly known as corporations or limited companies. The earliest joint stock company was reportedly formed at Toulouse, France in 1250. The Swedish company Stora is reported to have undertaken a stock transfer in 1288. The British East India Company, one of the most famous joint stock companies, was granted an English Royal Charter by Queen Elizabeth I on December 31, 1600. Soon afterwards, the Dutch East India Company issued shares in 1602. The evolution of the joint stock company was the major driving force for overseas trading and expeditions to Asia, Africa and the Americas. The risk in such ventures was colossal. But it was shared by the shareholders and limited to their investment. So there was no risk of going bankrupt. The amounts that could be raised were also much more than what could be raised by individuals or small groups. The joint-stock company thus became a more viable financial structure than previous guilds or state regulated companies. Joint stock companies were also the driving force behind the industrial revolution. Money could be raised easily for commercializing new inventions and innovation by setting up factories or developing sources for raw materials like mines and plantations.

The third most important financial institution to evolve was the Stock Markets where the shares could be bought and sold. The London Stock Exchange was established in 1802. Soon stock exchanges were established in all the European capitals. Fortunes could now be made or lost by speculating on the value of shares.

Industrial Revolution

The Industrial Revolution was a period in the 17th and 18th Century when major changes took place in agriculture, manufacturing, and transportation systems. It started in Britain and spread to Europe. It brought great socio-economic changes throughout Europe and North America and eventually the world. The manual labour based economies of the Great Britain, Europe and the United States began to be replaced by one dominated by industrial mass production with machinery. The first mechanically operated cotton spinning mill started working in Britain in 1743. Concrete was developed in 1756 using lime mortar. The textile industry was mechanized in 1769. The steam engine was invented in 1775. Development of new techniques of making iron and steel using coal instead of charcoal took place with the setting up of a blast furnace in 1709. Forges for making sections came up in1785. The first iron bridge was built in 1778. Mechanical mining using the steam engine commenced in 1770. Industrial revolution brought great economic benefits to Europe and America.

The development of financial institutions of the kind prevalent in Europe and later in the United States was not seen in the feudal or tribal nations of Asia, Africa and the Americas. Neither was there any industrial revolution outside Europe and the United states till the 20th Century. These countries fell behind the Europeans in economic and consequently military power. They were thus first exploited by the early European multinational companies and subsequently colonized between 1750 and 1950.

Early Multinational Corporations

Multinational companies are companies which operate outside their country of founding. Such companies started to appear in Europe at the start of the 7th Century.

British East India Company

The British East India Company was the oldest multinational company formed in Europe and the world. It was formed on 31 December 1601 as a joint stock company for pursuing trade with East Indies, a term used at the time to indicate South East Asia of today. The company traded mainly in cotton, silk, indigo dye, natural potassium nitrate, tea and opium. The high profits reported by the Company from its Indian operations prompted King James I of Britain to send a diplomatic mission to the court of Mughal Emperor, Jahangir in 1612. A commercial treaty was signed and the Company was granted exclusive rights to reside and build factories in many parts of India. In 1711, the Company established a trading post in Guangzhou (earlier known as Canton), China, to trade tea for silver. The Company came to rule large areas of India from the Battle of Plassey in 1757 till the Sepoy Mutiny of 1857 when the British Crown assumed direct administration of India under the Government of India Act of 1858. During this period it exercised military power and assumed administrative functions in addition to its commercial pursuits. It effectively functioned as a mega corporation.

British East India Company displayed many characteristics of modern day multinationals namely ruthless exploitation of the resources available particularly native farmers and plantation workers, influence peddling at home and in the country of operation and high profits at all cost. The Company developed a strong lobby in the English parliament. It lent a sum of £3,200,000 to the British treasury, in return for monopoly trading rights. By 1720, 15% of all British imports were from India. Almost all of it passed through the Company. Britain surged ahead of its European rivals in manufacturing and trade. Demand for raw materials and profits from India were boosted by the need to sustain the troops and the economy during Britain's wars with its European neighbors. As a result, Britain experienced higher standards of living. Its overseas trade increased. The Company became the single largest player in the British global market. However, by the middle of the 19th Century, the Company was in financial trouble due to increasing expenditure on military campaigns and administration. By the middle of the 19th century, the Company's rule extended across most of India, Burma, Malaya, Singapore, and Hong Kong and a fifth of the world's population was under its trading influence. The Indian Sepoy Mutiny of 1957-58 changed all that. The Company was nationalized and all its Indian possessions were taken over by the British Crown under the Government of India Act of 1958. Till its nationalization, the Company held a privileged position in relation to the British Government similar to what most multinational companies do today. As a result, it was frequently granted special rights and privileges, including trade monopolies and tax exemptions. These caused resentment among its competitors, who saw unfair advantage in the Company's position. Despite this resentment, the Company remained a powerful force for over 250 years. The Company was finally dissolved in 1874.

Dutch East India Company

Next came the Dutch East India Company. It was a chartered company established in 1602. It was the second oldest multinational company in the world. The government of Netherlands granted it a 21 year monopoly to carry out colonial activities in Asia. It was granted quasi-governmental powers, including the authority to maintain armies, build forts, wage wars, imprison and execute convicts, negotiate treaties, coin money, and establish colonies. The Company eclipsed all its rivals in the Asian trade. Between 1602 and 1796 the Company sent almost a million Europeans to work in the Asian trade on 4,785 ships, and netted for their efforts more than 2.5 million tons of Asian goods. By contrast, the rest of Europe combined sent only 882,412 people from 1500 to 1795, and the fleet of the British East India Company, the Company's nearest competitor, was a distant second to its total traffic with 2,690 ships and a mere one fifth the tonnage of goods carried by the Company. In 1640, the Company established itself in Sri Lanka, and broke the Portuguese monopoly of the cinnamon trade. In 1658, the Company's forces captured Colombo the capital. By 1659, the Portuguese were expelled from Sri Lanka and the Company secured the monopoly over cinnamon trade. The Company went on to conquer the entire Malabar Coast of India up to Goa. In 1652, Dutch established an outpost at the Cape of Good Hope (the southwestern tip of Africa, currently in South Africa) to re-supply its ships on their journey to East Asia. This post later became a full fledged colony called the Cape Colony, when more Dutch and other Europeans started to settle there. The Dutch East India Company established trading posts were also established in Iran, India, Malaysia, Thailand and China. By 1669, the Company was the richest private company the world had ever seen, with over 150 merchant ships, 40 warships, 50,000 employees, a private army of 10,000 soldiers, and a dividend payment of 40% on the original investment.

A major problem in the European trade with Asia at the time was that the Europeans could offer few goods that Asian consumers wanted. European traders therefore had to pay for spices with gold and silver, and this was in short supply in Europe. The Dutch and English had to obtain gold and silver by creating a trade surplus with other European countries. To overcome this problem the Company started an intra-Asiatic trade system, whose profits could be used to finance the spice trade with Europe. The Company traded throughout Asia. Silver and copper from Japan were used to trade with India and China for silk, cotton, porcelain, and textiles. These products were either traded within Asia for the coveted spices or brought back to Europe. The Company established a trading post on an artificial island off the coast of Nagasaki. For more than two hundred years, it was the only place where Europeans were permitted to trade with Japan.

Around 1670, the Third Anglo-Dutch War interrupted the Companies trade with Europe. In 1741, the Dutch were defeated by the Indian ruler of Travancore. Around the turn of the 18th Century, demand for Asian commodities increased in Europe. There was also an abundant supply of capital at low interest rates. This enabled the Company to easily finance its expansion in the new areas of commerce. Between the 1680s and 1720s, the Company approximately doubled in size. The tonnage of the returning ships rose by 125 percent in this period. However, the Company's revenues from the sale of goods landed in Europe rose by only 78 percent. For various reasons the era of expansion turned out to be less profitable with annual return on investment coming down to 3.5 percent while the average annual profit remained around 2 million guilders.

From 1730 to 1780, the fortunes of the Company continued to decline. Local rulers gradually squeezed the Company out of Iran, Surat, the Malabar Coast, and Bengal in India. The Fourth Anglo-Dutch War (1780-1784) finished the Company. British attacks in Europe and Asia reduced the Companies fleet by half. The British captured valuable cargo at sea and devastated its remaining power in Asia. The direct losses of the Company were calculated to be 43 million guilders. After the Fourth Anglo-Dutch War, the Company became a financial wreck. Its possessions in present day Indonesia and the debt were taken over by the Dutch Government and named the Dutch Republic of Batavia also called the Dutch East Indies. After independence it became the Republic of Indonesia. The Company was nationalized on 1 March 1796 by the Dutch Government. Most of the former possessions of the Company were subsequently occupied by Great Britain during the Napoleonic Wars. Some of these were restored to the Dutch Government by the Anglo- Dutch Treaty of 1814.

Other Early Multinationals

The success of the British and Dutch East India Companies prompted other European powers to set up their own multinational companies to obtain a share of the Asian trade. The French East India Company was established in 1664. It was granted a 50-year monopoly on trade in the Indian and Pacific Oceans, a region stretching from the Cape of Good Hope to the Straits of Magellan. The French monarch also granted the Company a concession in perpetuity for the island of Madagascar, as well as any other territories it could conquer. The Company failed to found a successful colony on Madagascar, but was able to establish ports on the nearby islands of Bourbon (today's Reunion Island) and Ile-de-France (today's Mauritius). By 1719, it had established itself in Chandanagore and Pondicherry in India. In the same year the Company was merged with other French trading companies. The reorganized corporation resumed its operating independence in 1723. The Company was not able to maintain itself financially, and it was abolished in 1769. The company was reconstituted in 1785. In 1790, its monopoly was withdrawn. Not accustomed to competition, the Company fell into steady decline and was finally liquidated in 1794.

The Danish East India Company was founded in 1616. It was focused on trade with India and had its base near Nagapattinam in Tamil Nadu, India. During its heyday, the Danish East India Company imported more tea into Europe than the British East India Company and smuggled 90 percent of it into Britain, and sold the tea at a huge profit. However, the company could not operate profitably for long and was dissolved in 1729. Its possessions in India became Danish Crown colonies. Denmark finally sold its settlements in India and the Danish Gold Coast to the British in 1850.

The Swedish East India Company was founded in 1731 for the purpose of conducting trade with the Far East. It grew to become the largest trading company in Sweden during the 18th century. However its European influence was marginal. It folded up in 1813.

The early European multinationals, like the multinationals of today, played an important role in enriching their countries of origin. They also established trading and military bases all over Asia, Africa and enabled Europe to colonize the world.

Europe Colonizes the World (1750 – 1950)

European colonies were the product of the European Age of Exploration starting in the 15th century. The initial motivation behind spreading out to the unknown parts of the world was trade. The growth of the Ottoman Empire and the fall of Constantinople to it in 1453, cut off over land trading routes with Asia. Europeans were thus forced to try to discover new sea trading routes. The early multinational companies of Britain, Netherlands, France, etc first set up trading posts along the coast lines and islands of Africa, Asia and Americas. They then built forts and armies, acquired territories and finally became the rulers. Only China, Mongolia and Japan escaped being colonized, possibly because their sea distance from Europe made it difficult and uneconomical to colonize them.

Portugal led the way in exploring along the coast of Africa in search for a maritime route to India. They established the first direct European diplomatic contacts with Indian states in 1511, China in 1513 and Japan in 1542. They were followed by Spain near the close of the 15th century. France, England and the Netherlands followed the Portuguese and Spanish trade routes into the Atlantic, Indian and the Pacific Oceans, reaching Australia in 1606 and New Zealand in 1642.

The Portuguese Colonial Empire was the first global empire in history. It also lasted the longest from 1415 capture of Ceuta, a tiny city state on the African coast opposite Gibraltar, to handing over of Macau, another city state to China in 1999. Portugal began the "Age of Exploration" by exploring the Atlantic coast of Africa, establishing trading posts for gold and slaves during the 15th century. In 1498, a Portuguese expedition commanded by Vasco da Gama reached India by circumnavigating Africa, and initiated Portuguese trade and colonization in the East. The Portuguese empire consisted of a vast number of small and large colonies that are now part of 49 different sovereign countries. The most important of them were Brazil, Portuguese West Africa (Angola), Accra (Ghana), Portuguese Gold Cost, Portuguese Guinea- Bissau, Portuguese Madagascar, part of Morocco, Portuguese East Africa (Mozambique), Zanzibar (Oman), Aden, Bahrain, Sri Lanka and Goa. Some of these were lost to other European powers, particularly Great Britain.

Spain took control of a large part of North America including Mexico, Florida in the United States, all of Central America and a great part of South America including Argentina, Peru, Colombia, Venezuela, the Caribbean islands including Cuba, and the Philippines. Britain colonized the whole of Australia and New Zealand, most of India, Malaysia, Burma (Myanmar), Ceylon (Sri Lanka), and large parts of Africa including Egypt, Kenya, Uganda, Rhodesia (Zimbabwe), South Africa, Namibia, Nigeria, Jamaica and Trinidad and Tobago in the Caribbean Islands and Canada. France held parts of Canada and India (nearly all of which was lost to Britain in 1763), Indochina (Vietnam, Laos and Cambodia), large parts of Africa including Sudan, Rwanda, Ivory Coast, Algeria, Tripolitania (Libya), Louisiana Tract in North America (later sold to the United States) and Lebanon. The Netherlands established a large number of trading posts in Sri Lanka, India, New York in North America but lost all of them to Britain in the 4th Anglo Dutch War. It however held on to Batavia (Indonesia) till the end of World War II. Germany colonized Tanganyika (Tanzania), Rwanda (up to 1917), German South West Africa (Namibia) in Africa. Belgium colonized Congo. Italy colonized Somalia, Eritrea and part of Somalia. Russia acquired Siberia, Central Asia and Alaska (which it later sold to the United States).

This colonization helped the economy of the European countries owning them. Trade flourished because of the ability of the colonizers to access local produce like cotton, silk, spices, indigo, coffee, coco, sugar, jute, timber, ivory and handicrafts which were in great demand in the affluent societies of Europe. The colonies also provided captive markets for manufactured goods and weapons. By the late 16th Century, silver obtained from South, Central America and Mexico accounted for one fifth of the Spain's total budget. The European countries fought wars amongst themselves that were largely paid for by the money coming in from the colonies. Nevertheless, the slave trade, sugar cane and banana plantations of the West Indies (Caribbean Islands), rubber plantations of Malaya, and coffee and coco plantations in Africa and South America produced huge profits for the European countries.

European powers exploited the resources and people of their colonies to the hilt. In India, the British forced the farmers of Bengal and Bihar to cultivate Indigo instead of rice. It did not matter that many starved and there was a famine in 1942. What mattered was that the British companies made handsome profits. It is also said that the British cut off the thumbs of the Muslin weavers of Bengal because the cloth manufactured in Britain could not match the local fabric "Muslin" which they produced. It did not matter that the weavers starved. What mattered was that British cloth produced in Manchester could be sold and British companies made good profit.

Slave Trade

The primary objective of European colonists was to exploit New World's land and resources for profits. Native peoples were at first utilized as slave labor by the European colonists. Large numbers of them died from overwork and diseases. A vast amount of labor was needed to create and sustain plantations that required intensive labor to grow, harvest, and process prized tropical crops. When a sufficient unpaid or under paid workforce could not be locally collected, importing slaves seemed to be the logical solution. Western and Central Africa and India became the source for enslaved people to meet the demand for labour.

A number of African kings and merchants took part in the trading of enslaved people from 1440 to about 1833. They sold their prisoners of war to European or Arab buyers. Selling captives or prisoners was common practice amongst Africans and Arabs during that era. With the rise in demand due to European needs, enslaving ones enemy became less a consequence of war, and more and more a reason to go to war. The European traders exported goods from Europe to African Kingdoms. For each slave, the African rulers would receive weapons, ammunition and manufactured goods from Europe. European traders under their countries naval protection then transported enslaved Africans across the Atlantic Ocean in their own specially designed ships to the Americas and the Caribbean Islands. The plantation economies of the New World were built on slave labor. Seventy percent of the enslaved people brought to the new world were used to produce sugar, the most labor-intensive crop. The rest were employed for harvesting coffee, cotton and tobacco, and in some cases in mining. The produce of slave labour operated plantations in the colonies including cotton, sugar, tobacco, molasses and rum were then shipped back for sale in Europe at huge profits. In the European colonies, the slaves' children were legally enslaved at birth.

The enslavement of Africans and shipping them to South American colonies of the Portuguese and Spanish empires started in 1502. The Portuguese bought slaves from African rulers and merchants. They also carried out expeditions to capture and enslave Africans. They then either sold them to other European colonizers to make money or used the slaves for running plantations in their own colonies. The Spanish empire took money and awarded license to merchants to trade in slaves in their colonies. After 1580, the British, French and Dutch traders joined the lucrative trade. The main destinations of the slaves were the Caribbean colonies, Brazil, and North America. These European countries built colonies in the New World whose economies were dependent on slave labour. Britain also shipped slaves and "bonded labour" (poor people who had borrowed money at high interest rates and were forced to work for generations without remunerations) from India to its colonies particularly Fiji, East and Southern Africa and the Caribbean Islands. Descendants of these Indian are found in very large numbers in these countries.

Most historians now agree that at least 12 million slaves left the African continent between the 15th and 19th century. 10 to 20 per cent died on board ships. Thus a figure of 11 million enslaved people transported to the Americas. The slave population multiplied with time. The West Indian colonies of the European powers were some of their most lucrative possessions.

Denmark, which had been active in the slave trade, was the first country to ban the trade through legislation in 1792. The ban took effect in 1803. Britain banned the slave trade in 1807, imposing stiff fines for any slave found aboard a British ship. The Royal Navy, which then controlled the world's seas, moved to stop other nations from continuing the slave trade. Between 1807 and 1860, the West Africa Squadron of the British Navy seized approximately 1,600 ships involved in the slave trade and took custody of 150,000 Africans who were aboard these vessels. However, several hundred slaves a year were transported by the British navy to the British colony of Sierra Leone, where they were made to serve as 'apprentices' in the colonial economy until the Slavery Abolition Act of 1833 was passed in Britain. The British planters were compensated with twenty million pound sterling, and slaves were required to remain as slaves on the plantations for a further six years.

Trans-Atlantic Slave Trade lasted for over three and a half centuries from 1502 to 1859. Can any American or European economist calculate the wealth generated by slave trade and the productivity of over 12 million African and Indian slaves who worked on the plantations, mines, roads, railways and homes without any remunerations in the colonies for a period of over 350 years? Trading in slaves and their exploitation is the foundation on which much of the prosperity of Europe was built.

Opium Wars with China

The Chinese Emperor prohibited the sale and smoking of opium in 1729. The East India Company established an elaborate scheme to defeat the ban. Opium produced in India was taken to the Chinese coast hidden aboard British ships and then smuggled into China by native merchants to pay for tea imports. British exports of opium to China grew from an estimated 15 tons in 1730 to 75 tons in 1773. For the fifty years from 1773 to 1823, opium trade with China became they main money spinner for the East India Company.

In 1756, the Qing Dynasty ruling China passed a decree which restricted foreign trade to one port, Canton, and stopped foreigners from entering China. As a result, the British East India Company faced a trade imbalance in favor of China. To overcome the problem, the company invested heavily in opium production and sale to Chinese smugglers. British and United States' (then a British Colony) merchants brought opium from the British East India Company's factories in the Indian state of Bengal, and shipped it to the coast of China, where they sold it to Chinese smugglers for silver. The Company had its monopoly on opium trade recognized by the British government, which itself wanted the silver. By the 1820s China was importing 900 tons of Indian opium annually. By 1938, the figure reached 1400 tons. The Chinese tried to stop the smuggling. Some native drug traffickers were put to death. They forced the British merchants to surrender their opium to be destroyed. When the British learned of what was taking place in Canton, they sent a large contingent of the British Indian army, which arrived at Canton in June 1840. British warships wreaked havoc on coastal towns. After the British captured Canton, they sailed up the Yangtze River and captured the tax barges of the Chinese Emperor. It was a devastating blow to the Chinese Empire. In 1842, the Qing authorities sued for peace, which concluded with the Treaty of Nanking ending the First Opium War. The treaty was ratified in 1843. In the treaty, China was forced to pay an indemnity to Britain, open four ports to Britain for trade, and cede Hong Kong to Queen Victoria. In the supplementary Treaty of the Bogue, the Qing Empire also recognized Britain as an equal sovereign power and gave British subjects extra-territorial privileges in ports covered in the treaty.

The Chinese authorities were reluctant to adhere to the terms of the 1842 Treaty of Nanking. They tried to keep out as many foreign merchants as possible and victimized Chinese merchants who traded with the British at the ports opened under the Treaty. To protect those Chinese merchants who were friendly to them at Hong Kong, the British granted their ships British registration in the belief that the Chinese authorities would not interfere with vessels which carried the British flag. In October 1856 the Chinese authorities in Canton seized a vessel called the "Arrow" which had been engaged in piracy. The "Arrow" had formerly been registered as a British ship and was still flying the British flag when it was seized. The British consul in Canton demanded the immediate release of the crew and an apology for the insult to the British flag. The crew was released, but no apology was given. In reprisal, the British governor of Hong Kong ordered his warships to bombard Canton. The incident set the stage for the Second Opium War.

A strong Anglo-French force was dispatched to teach the Chinese a lesson. The force occupied Canton in December 1857, and then cruised north to briefly capture the Taku Forts near Tientsin in May 1858. The invasion led the Chinese to accept the Tientsin Treaties of June, 1858. Under the treaty, China agreed to open more ports for foreign trade, to legalize opium imports, to establish a maritime customs service with foreign inspectors, to allow foreign diplomats at Peking and to allow Christian missionaries into interior China. China soon abrogated the Anglo-French treaties and refused to allow foreign diplomats into Peking. In 1859, a British naval force was repulsed with losses. Undeterred by the setback, another Anglo-French force of 11000 British and 7000 French forces attacked China in 1860. The force reached the walls of Peking (Beijing) on September 26. The Old Summer Palace at Peking was occupied, looted and burned on October 24. China capitulated. Ten new ports including Tientsin were opened to trade with the western powers, foreign diplomats were to be allowed at Peking and the opium trade was deregulated. Kowloon, on the mainland opposite Hong Kong Island, was surrendered to the British. An indemnity of three million ounces of silver was paid to Great Britain and two million to France. These treaties were soon followed by similar arrangements with the United States. The Treaties later came to be known as the "Unequal Treaties". The Opium Wars was the start of China's "Century of Humiliation".

Post War Europe

The World War II completely devastated Europe. Much of its cities and industries were completely destroyed by bombing. The governments were impoverished by the war expenses. Governments required American finances to rebuild their countries and economies. The British pound lost its premium status to the dollars. The colonies started independence movements. The European countries found it impossible to finance the colonial wars of independence. One by one, the colonies became independent. The European countries lost their cheap sources of raw material and captive markets. Local industrial production ate into their exports. Trade balances reversed as European imports exceeded their exports. As neo-liberal capitalism caught on, European companies except Germans shifted their mining and manufacturing to the developing world in search of higher profits. The European investors made more money. But unemployment and poverty of the ordinary people kept increasing. Government debts are rising to dangerous levels and sovereign defaults seem round the corner. The European Union and its central bank have spent billions of dollars to bail out Greece and banks in Spain. Governments have initiated austerity measures such us increasing retiring age and reducing salaries and pensions and axing public sector jobs. The austerity measures are deeply unpopular and labour unrests and protests break out from time to time. Many of the European countries like Britain, Italy and Greece are in recessions. Many banks in Europe are in danger of collapsing and require billions of dollars in bailouts. The chances of Greece leaving the European Union are real. Spain and Italy are likely to require bailouts.

In 2011, two hundred fifty five years after 1756 when the seeds of the Opium wars were sown, Britain again has a trade deficit with China. Today it has no colonies to exploit or opium to sell at gunpoint. It has no slaves to produce cheap goods and services. Britain and most of Europe can only borrow money to balance their budgets and seek foreign investment to create jobs. They can only borrow or print money to import food, fuel, household goods, clothes and shoes from the developing world. Britain is decommissioning warships. China and India are adding new ones.

Conclusion

A study of economic history of Europe clearly proves that the wealth of the nations of Western Europe is not solely or even primarily due to innovation and enterprise. Europe colonized most of the world from the 17th to the 20th Century. Spain plundered all the Inca and Maya gold and silver and ruled much of Mexico, Central and Latin America. Britain, France, Germany, Holland, Italy and Portugal colonized most of Asia and Africa and took complete control of trade and commerce in these countries. They took billions of dollars worth of gold and jewelry as war compensation and taxes from the defeated countries. Many of the British crown jewels had adorned crowns of Indian and other kings. Europeans took over and exploited the natural resources of the colonized countries like minerals, spices, tea, coffee, rubber, ivory and silks with minimum possible compensation and slave labour. It brought them great riches and left the colonies in abject poverty and a state of underdevelopment.

Is it also not true that most of the economy of European nations were developed with the help of slaves from Africa at almost no cost at all? Slaves from Africa and bonded labor from India were extensively used in cotton, tobacco, sugar, banana, coffee, tea and rubber plantation in the Caribbean Islands, South America, Africa and Asia and South Pacific Islands.

England, France and United States fought and won wars with China for the right to sell opium. These countries not only made great wealth from this narcotic trade but also obtained the territory of Hong Kong and about 10 millions oz of silver as compensation for the war.

It should be quite obvious that the wealth of the Western European Economies is not purely a result of innovation and enterprise. Much of it is due to barbaric acts and practices which would not be acceptable in today's world. History cannot be reversed. Open minded economists must clearly understand that Europe has developed at the cost of their colonies. They plundered the riches of the kings and people of the countries they colonized. They exploited the mineral resources of the colonies without any compensation or royalties. They enslaved millions of people. They have a head start. But things are changing. The developed economies, without colonies and slaves to support their economies, are no longer competitive and are on the decline. The leading developing countries like Brazil, Russia, India, China and South Africa and the Asian Tiger Economies are catching up.

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### Chapter 3: Economic Growth and Decline of United States

Origin of United States

The territory known as United States of America today was the home to a number of native Indian Nations. The area was colonized by Europe. Britain established colonies on the eastern regions of United States. France colonized the Mississippi River valley and called it the Louisiana Tract. Spain colonized the shores of the Gulf of Mexico in Mexico and Florida.

The British established 13 colonies along the east coast of North America from New Found land to Florida. The first colony to survive was James Town settlement of Virginia which was founded in 1607. The early colonies consisted of English farmers whose primary cash crop was tobacco. All the colonies were independent farming economies. The colonies were established under a system of Proprietary Governors (representatives of the charter companies who established the colonies) who were appointed under mercantile charters to English joint stock companies to found and run settlements. England also took over the Dutch colony of New Netherlands (including the New Amsterdam settlement) which was renamed New York in 1664. With New Netherlands, the English came to control the former New Sweden which the Dutch had conquered earlier. This became part of Pennsylvania. The 13 British colonies joined together to form the United States of America in 1776, fought a war of independence against Britain and were granted independence in 1883. In about 270 years the United States grew to become the largest, integrated, industrialized economy in the world.

The colonies were established by driving away the native Indian population. Initially there was very little resistance. Land was plentiful and the Indians just moved westwards. But the Indians resisted when the settlers moved west from the Appalachian Mountains. Frontier warfare during the American War of Independence between the Native Indians and the settlers was particularly brutal. Numerous atrocities were committed on both sides. Noncombatants of both races suffered greatly during the war, and villages and food supplies were frequently destroyed during military expeditions. The largest of these expeditions was the Sullivan Expedition of 1779, which destroyed more than 40 Iroquois villages in order to neutralize Iroquois raids on New York. The expedition failed to have the desired effect. Indian resistance became even more determined. In this connection, the orders of George Washington to General John Sullivan, at Head-Quarters May 31, 1779 make interesting reading:

" _The Expedition you are appointed to command is to be directed against the hostile tribes of the Six Nations of Indians, with their associates and adherents. The immediate objects are the total destruction and devastation of their settlements, and the capture of as many prisoners of every age and sex as possible. It will be essential to ruin their crops now in the ground and prevent their planting more_

I would recommend, that some posts in the center of the Indian Country, should be occupied with all expedition, with a sufficient quantity of provisions whence parties should be detached to lay waste all the settlements around, with instructions to do it in the most effectual manner, that the country may not be merely overrun, but destroyed.

But you will not by any means listen to any overture of peace before the total ruinment of their settlements is effected. Our future security will be in their inability to injure us and in the terror with which the severity of the chastisement they receive will inspire them."

The genocide and ethnic cleansing of the native Indians continued till after the battle of Little Big Horn in 1876 which was the last major Indian victory in battle. The native Indians were bundled into 310 Indian Reservations spread over a number of states in an area totaling 2.3 percent of the total land mass of the United States which was once their home.

A defeated Napoleon sold the Louisiana tract to the United States in 1803 rather than have it fall into British hands. The region consists of 12 states in the north-central and north-eastern United States, namely Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin. Florida was annexed in 1815. Victory in the Mexican Wars (1820-30) enabled the United States acquired the northern half of Mexico. This area later became the states of California, Nevada, Arizona, New Mexico and Utah. Oregon was ceded by the British to the United States in 1846. Alaska was purchased from Russia in1867 and became the 49th US State.

Colonial Economy Before 1783

England's colonizing what would become the United States was mainly an economic venture. Charter joint stock companies, formed by groups of stockholders (usually merchants and wealthy landowners) ventured across the Atlantic in search of profit. While the private sector financed the companies, the King of England provided each project with a charter or grant conferring economic rights as well as political and judicial authority. The colonies generally did not show quick profits. The English investors often sold their colonial charters to the settlers. The colonists were left to build their own lives, their own communities, and their own economy.

Throughout the colonies, people lived primarily on farms and were self-sufficient. They grew tobacco, and sold timber and tar, both categories of naval supplies needed by England. Settlements spread, and trade in deerskin, lumber, and beef thrived. Rice cultivation was developed on a large scale with the help of slaves imported from rice-growing regions of Africa. Indigo, a dye, and a lucrative cash crop was grown with the help of African slaves. Slave labor was integral to making the cultivation of rice, tobacco and indigo profitable as cash crops. South Carolina had the largest number of slaves in the colonies. A few cities developed. Small local industries such as sawmills, and gristmills emerged as the colonies grew. Entrepreneurs established shipyards to build fishing fleets and, in time, trading vessels. Iron forges were developed. By the 18th century, regional patterns of development had become clear. The New England colonies relied on shipbuilding and sailing to generate wealth. Plantations using slave labor was the main economic activity in Maryland, Virginia, and the Carolinas grew tobacco, rice, and indigo. The middle colonies of New York, Pennsylvania, New Jersey, and Delaware exported general crops and furs. Except for slaves, standard of living was generally higher than in England itself.

War of Independence (1775 to 1787)

This was the period of the War of Independence. The Congress and the American states had great difficulty in financing the war. In 1775 there was at most 12 million dollars in gold in the colonies, not nearly enough to cover immediate expenses of the government, let alone on a major war. The British made the situation much worse by imposing a tight blockade on every American port, which cut off almost all imports and exports. One partial solution was to rely on volunteer support from militiamen, and donations from patriotic citizens. Another was to delay actual payments, pay soldiers and suppliers in depreciated currency, and promise it would be made good after the war. Indeed, in 1783 the soldiers and officers were given land grants to cover the wages they had earned but had not been paid during the war. A French loan was used in 1782 to set up the private Bank of North America to finance the war.

Early Years (1787 to 1817)

The United States' Constitution was adopted in 1787. It established that the entire nation was a single unified market, with no internal tariffs or taxes on interstate commerce. Alexander Hamilton was the first secretary of the treasury during the administration of George Washington. He succeeded in building a strong national finance based on taking over the state debts, bundling them with the old national debt and creating new securities which were sold to the wealthy. The wealthy, holding government securities now had an interest in keeping the new government solvent. Hamilton funded the repayment of debt with tariffs on imported goods and a highly unpopular tax on whiskey. Hamilton believed that the United States should pursue economic growth through diversified activities like shipping, manufacturing, and banking in addition to agriculture. He sought and got the Congressional authority to create the First Bank of the United States in 1791.

In 1801, Thomas Jefferson became president and turned to promoting a more decentralized, agrarian democracy called "Jeffersonian democracy". It was based his philosophy of protecting the common man from political and economic tyranny. He particularly praised small farmers as "the most valuable citizens." However, Jefferson did not change Hamilton's basic policies. The charter of the First Bank of United States was allowed to expire in 1811. However, the War of 1812 with the British established the need for a national bank and President Madison reversed Jefferson's decision. The Second Bank of United States was established in 1816, with a 20 year charter.

The first industrial revolution started with the invention of cotton gin in 1793. It was a machine that separated raw cotton from seeds and other waste. Soon, large plantations, based on slave labor, expanded in the rich lands taken over from Indians during the 1812 War from the Carolinas westward to Texas. The raw cotton was shipped to textile mills in Britain, France and New England. The New York Stock Exchange was established 1817.

Days of the American System (1818-1860)

This period saw a major westward expansion. The Louisiana Tract in the Mississippi River valley was inhabited by a large number of Indian tribes. They were ethnically cleansed and their vast lands were taken over without paying a penny. Millions of whites and their slaves moved to the more fertile farmlands of this vast area. The States built roads and waterways along the Mississippi and its tributaries opening up markets for western farm products.

The American System

The "American System", originally called "The American Way", was a mercantilist economic policy that was followed by the administration in the first half of the 19th Century. The policy consisted of three parts: a tariff to protect and promote American industry; a national bank to foster commerce; and federal subsidies for roads, canals, and other measures' to develop profitable markets for agriculture. Congressman Henry Clay was the plan's foremost proponent and the first to refer to it as the "American System". The key features of the System or policy was:

It supported a high tariff to protect American industries and generate revenue for the federal government. A 20 to 25 percent tax on imported goods was proposed to protect a nation's business from foreign competition. Congress passed it in 1816. It made European goods more expensive and encouraged consumers to buy relatively cheap American made goods.

The policy required maintenance of high public land prices to generate federal revenue.

It called for preservation of a central bank to stabilize the currency and rein in risky state and local banks. It enabled the Federal Government to borrow from it rather than from private banking system. This was established as the Second Bank of United States in 1816.

It stressed on development of infrastructure such as roads and canals which would knit the nation together and be financed by the tariff and land sales revenues. Among the most important internal improvements created under the American System were the Erie Canal and the Cumberland Road, the first major national highway to be built in the United States from Cumberland in Maryland to Vandalia in Illinois.

It called for Import substitution or setting up industries to produce goods imported from Europe. This feature of the American System was adopted in much of the Third World during the twentieth century.

The "American System" was opposed by the Western and Southern States. Portions of the American System were enacted by the United States Congress. However similar modernization programs were enacted in most states on a bipartisan basis.The Second Bank of United States was chartered in 1816 for 20 years. High tariffs were maintained from the days of Alexander Hamilton or 1791 until 1832. However, the national system of internal improvements to infrastructure was never adequately funded. At this time, Britain, under the influence of Adam Smith had given up "Mercantilism" and adopted the "British System" of laissez-faire and free trade.

Boom of 1821-36

1819 to 1821 was a period of downturn in the American economy. It was considered to be the after effect of its 1812 war with Britain. By 1821, the economy had recovered. The national debt which had reached 90 million dollars was totally liquidated by 1934. General Andrew Jackson (1829–1837), a rich slave holder and supporter of slavery, became the seventh president of United States. He drove the Indian population west of the Mississippi River, into the State of Oklahoma. He inherited a fast growing economy. The population of United States rose from about 10 million in 1821 to 16 million in 1837. There was tremendous growth of the cities and infrastructure. Steam boat tonnage in the Mississippi and its tributaries rose from about 63,000 tons in 1830 to 253,000 tons in 1837. Cotton exports rose from about 536,000 bales in 1833 to about 916,000 bales in 1837. The price also doubled from 10 cents a pound to 20 cents a pound. The unprecedented prosperity created a major problem. The wealthy began to speculate in land. Public land (land taken over by the American Government by driving away the Indians) was offered in unlimited quantities to the people at $1.25 per acre. The average annual revenue from this sale of land was about $ 139,000 from 1820 to 1829. This rose sharply up to $ 14.7 million in 1835 and almost $ 25 million in 1836. The speculation was fuelled by rampant printing of paper money and uncontrolled lending by banks. The total lending by banks increased from $ 200 million to $ 324 million and paper money in circulation rose from $61 million to $95 million in during the same period. By 1836, loans and discounts had reached about $700 million and notes in circulation to about $140 million. Traders and speculators of commodities also started to hoard flour for profit.

Panic of 1837

To stop the speculation, President Jackson opposed the renewal of the charter of the Second Bank of the United States, which he believed favored the entrenched interests of rich speculators. Jackson also opposed payment for land with paper money and demanded the government be paid in gold and silver coins. His actions led to a liquidity crunch and the "Panic of 1837", the first major financial crisis of the American Economy and stopped business growth for three years. There were demonstrations against inflation and "Flour Riots" in 1837 when some warehouses storing flour were burnt. Price of cotton fell to 5 cents per pound in1980. Out of 850 banks in the United States at the time, 343 failed. Another 52 failed partially. There was a brief recovery in 1838-39 but the economy did not recover fully till 1842.

Period of Recovery

Economic growth resumed after 1842. Expansion into new farmlands in the west restarted. By 1860, on the eve of Civil War, 16 percent of the people lived in cities with 2500 or more people. A third of the nation's income came from manufacturing. Urbanized industry was limited primarily to the Northeast. Cotton cloth production was the leading industry, with the manufacture of shoes, woolen clothing, and machinery also expanding. Most of the workers in the new factories were immigrants or their children. Between 1845 and 1855, some 300,000 European immigrants arrived annually. Many remained in eastern cities, especially mill towns and mining camps, while those with farm experience and some savings bought farms in the West.

The first rail road company was chartered in Maryland in 1827. It was to connect Baltimore in Maryland to Ohio River. The project was completed in 1852. Many more railroad companies were chartered. Some of the companies were financed by European banks. Most of the important towns in the east were connected by 1860. Numerous short lines were built, especially in the south, to provide connections to the river system. The First Transcontinental Railroad was built across the country in the 1860s, linking the railroad network of the eastern United States with California on the Pacific Coast. Railroads made a decisive impact on the U.S. economy especially in the 1850–1873 era. Railroads opened up remote areas, drastically cut the cost of moving freight as well as passenger travel, and stimulated new industries such as steel and telegraphy. It provided a fillip to the profession of civil engineering. Railroads greatly increased the importance of cities such as Atlanta, Billings, Chicago, and Dallas. Railroad executives invented modern methods for running large-scale business operations and created a blueprint that all large corporations later followed.

The California Gold Rush

Gold was discovered in California at the site of a lumber mill near the town of Coloma on the America River in 1848. At the time, the place was in the Mexican district of Alta California. The area was transferred to the United States under the Treaty of Guadalupe in February 1848 at the end of the American-Mexican War. About 90,000 gold seekers arrived in California in 1989 and another 300,000 by 1855. Initially gold was "panned". Hydraulic mining was introduced in 1853. The discovery of gold made a large contribution to the wealth and development of the region. The Gold rush had a severe adverse effect on the environment and the native Indian population in California which fell from around 150,000 to 30,000.

American Civil War 1861-1865

This was the period of American Civil War. It was a devastating conflict. About 620,000 soldiers and an unknown number of the civilian population died in the conflict. The Republican Party, established in 1856, represented the industrialized North. They came to power in 1861 with Abraham Lincoln as president and pushed for abolition of slavery and expansion of industry, commerce and business. In 1862, the first Pacific railroad was chartered. In 1863 a national banking system was established to finance the American Civil War. In every city a "First National Bank" was established, and many still exist. The industrial advantages of the North over the South helped secure a Northern victory. The Northern victory changed its economic system. The slave labor system was abolished. The world price of cotton plunged, making the large southern cotton plantations much less profitable. Northern industry, which had expanded rapidly before and during the war, surged ahead. Industrialists came to dominate many aspects of the nation's life, including social and political affairs. The devastation of the South was great and poverty ensued. Incomes of whites dropped in the Southern states, but income of the former slaves rose.

Era of Reconstruction (1867-1877)

This period which followed the American Civil War is known as the "Era of Reconstruction". The infrastructure of much of the South, roads, bridges, and railroads which were scarce even before the war had been destroyed or damaged during the war. Because of a large slave population, pre-war Southern States did not have public schools. The aim of reconstruction was to reconstruct war damage, repair economy of the Southern States and educate and rehabilitate the freed slaves. The government introduced various reconstruction programs, including the founding of public schools in most Southern States for the first time, and the establishment of charitable institutions. Every Southern state subsidized railroads, which policy makers felt could haul the South out of isolation and poverty. Millions of dollars in bonds and subsidies meant for reconstruction were fraudulently pocketed by unscrupulous businessmen. It is said that one business group in North Carolina spent $200,000 in bribing the legislature and obtained millions in state money for its railroads. Instead of building new track, it used the funds to speculate in shares, reward friends with extravagant fees, and enjoy lavish trips to Europe. In spite of all the corruption and difficulties, thousands of miles of railway lines were built as the Southern system expanded from 17,700 km in 1870 to 46,700 km in 1890. The lines were mostly owned Northerners. Railroads helped create a mechanically skilled group of craftsmen and broke the isolation of much of the region.

In the United States, from the earliest days until today, a major source of state revenue was the property tax. In the South, wealthy landowners were allowed to self-assess the value of their own land. These fraudulent assessments were very low, and pre war property tax collections were very poor. In the Southern States, revenues mainly came from fees and from sales taxes on slave auctions. During Reconstruction, new spending on schools and infrastructure, combined with fraudulent spending resulted in huge deficits and forced the states to dramatically increase property tax rates. In places, the rate went up to ten times higher. In part, the new tax system was also designed to force owners of large estates with huge tracts of uncultivated land either to sell or to have it confiscated for failure to pay taxes. Property taxes thus served as a market based system for redistributing the land to the landless freed slaves and white poor.

To modernize traditional agriculture, reformers founded the Grange Movement in 1867. Federal land grants helped each state create an agricultural college and a network of agents who demonstrated modern techniques to farmers. The American labor movement began with the first significant labor union, the Knights of Labor in 1869.

Panic of 1873

An economic depression called "The Panic of 1873" hit the Southern economy hard and disillusioned many Republicans who had gambled that railroads would pull the South out of its poverty. The price of cotton fell by half; many small landowners, local merchants and cotton wholesalers went bankrupt. Sharecropping for black and white farmers became more common as a way to spread the risk of owning land. New York Stock Exchange closed for ten days in 1873. 89 of the country's 364 railroad companies went bankrupt. A total of 18,000 businesses failed between 1873 and 1875, unemployment reached 14 percent by 1876.

The economy of the Southern States remained based on cotton farming. Former slaves became wage laborers, tenant farmers or share croppers. They were joined by many poor whites. The population grew faster than the economy. The only significant manufacturing industries in the South were textile mills in the Carolinas, and some steel mills in Alabama.

The Gilded Age (1878-1890)

After 1877, the economy began to revive. The industrial economy of the northern states had been boosted by the war. The steam boat made its appearance on the Potomac River in 1786 and made river traffic faster and cheaper. The development of railroads had an even greater effect, opening up vast stretches of new territory for development. Railroads also attracted a good deal of domestic and European private investment. An explosion of new discoveries and inventions took place, and brought in the "Second Industrial Revolution". Railroads greatly expanded in mileage and built stronger tracks and bridges that handled heavier cars and locomotives, carrying far more goods and people at lower rates. Refrigerated railroad cars came into use. The telephone, typewriter and electric light were invented. By 1890, the USA leaped ahead of Britain for first place in manufacturing output.

Parallel to these achievements was the development of the nation's industrial infrastructure. Coal was found in abundance in the Appalachian Mountains from south Pennsylvania to Kentucky. Crude oil was discovered in western Pennsylvania. It was mainly used for lubricants and for kerosene for lamps. Large iron ore mines opened in the Lake Superior region of the upper Midwest. Steel mills thrived in places where coal and iron ore could be brought together to produce steel. Large copper and silver mines opened, followed by lead mines and cement factories. Gold continued to be extracted in California. By mid 1880, 11 million ounces of gold (370 tons) worth $ 15 billion (2010 prices) had been extracted. In 1990, a new mining technique called dredging reduced mining costs considerably. By the turn of the century, 20 million ounces of gold worth $ 20 billion (2010 prices) were extracted. Gold was also discovered in Virginia, Dakota and very large quantities in Alaska.

The largest labor union, the Knights of Labor, collapsed in the 1880s and was displaced by strong international unions that banded together as the American Federation of Labor (AFL) under Samuel Gompers. Rejecting socialism, the AFL unions negotiated with owners for higher wages and better working conditions. Union growth was slow until 1900.

The Gilded Age saw the greatest period of economic growth in American history. After the short-lived panic of 1873, the economy recovered with the advent of hard money policies and industrialization. From 1869 to 1879, the US economy grew at a rate of 6.8 percent for real GDP and 4.5 percent for real GDP per capita. The economy repeated this period of growth in the 1880s, in which the wealth of the nation grew at an annual rate of 3.8 percent, while the GDP was also doubled. Capital investment also increased tremendously during the 1880s, increasing nearly 500 percent, while capital formation doubled during the decade. Long-term interest rates also declined to 3 to 3.5 percent for the first time.

Congress enacted the Interstate Commerce Act regulating railroads in 1887 and the Sherman Antitrust Act to prevent large firms from controlling a single industry in 1890. However, these laws were not rigorously enforced until the years between 1900 and 1920, when Republican President Theodore Roosevelt (1901–1909) took office.

Age of Conflict between the Progressives and the Tycoons (1890-1913)

The period from 1890 to 1907 was a period of great economic growth led by big business houses. The volume of stocks traded on the New York Stock Exchange increased six times between 1896 and 1901. A new building for the stock exchange costing $4 million was opened in 1903.

By the turn of the century, a middle class had developed that was critical of both the business elite and the somewhat radical political movements of farmers and laborers in the Midwest and West. Known as "Progressives", these people favored government regulation of business practices to ensure competition and free enterprise. But most political leaders were reluctant to involve the federal government too heavily in the private sector, except in the area of transportation. In general, they accepted the concept of liaises-faire, a doctrine of the tycoons opposing government interference in the economy except to maintain law and order.

Panic of 1907

The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred when the New York Stock Exchange fell close to 50 percent from its peak of the previous year. The crisis was triggered by the failed attempt by some investors to corner the shares of United Copper Company on the stock market in October 1907. When this bid failed, banks that had lent money to the cornering scheme suffered runs that later spread to affiliated banks and trusts. This in turn led to the downfall of the Knickerbockers Trust Company a week later. The Knickerbockers Trust Company was New York City's third largest trust company. The collapse of the Knickerbockers spread fear throughout the city's trust companies as regional banks withdrew their reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks. This in turn led to a liquidity crisis. The crisis could have been more severe if financier J. P. Morgan had not pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the banking system. At the time, the United States did not have a central bank to inject liquidity back into the market. By November 1907 the crisis had largely ended.

Age of the Tycoons

After 1910, mass production was sped up by the electrification of factories. In 1913 Henry Ford introduced the assembly line, a step in the process that became known as mass production. Many Americans came to idealize businessmen who amassed vast financial empires. Often, their success lay in seeing the long range potential for a new service or product, as John D Rockefeller did with oil. They were fierce competitors, and single minded in their pursuit of financial success and power. Other business giants included Jay Gould, who made his money in railroads, J P Morgan who made his money in, banking, and Andrew Carnegie who made his money by producing steel. Some tycoons were honest according to business standards of their day. Others, however, used intimidation, bribery, and guile to achieve their wealth and power. For better or worse, business interests acquired significant influence over government. Morgan operated on a grand scale in both his private and business life. He and his companions gambled, sailed yachts, gave lavish parties, and built palatial homes. In contrast, men such as Rockefeller and Ford exhibited puritanical qualities. They retained small town values and lifestyles. As devoted church goers, they felt a sense of responsibility to others. They believed that personal virtues could bring success. They believed in hard work and thrift. Later their heirs would establish the largest philanthropic foundations in America. Most Americans enthusiastically embraced the idea of moneymaking. They enjoyed the risk and excitement of business enterprise, as well as the higher living standards and potential rewards of power and acclaim that business success brought. In 1896 the nation accepted the gold standard and a program of sustained industrialization. Farm tractors began being mass produced.

Progressives have their Way

When Democrat Woodrow Wilson (1913-1921) was elected President with a Democratic Congress in 1912, he implemented a series of progressive policies. In 1913, the Sixteenth Amendment which allowed the Congress to collect income tax without distributing it among states as per their population was ratified. Thus income tax was instituted in the United States. Wilson also created the Federal Reserve, the central banking system of the United States in 1913 with the enactment of the Federal Reserve Act. Current functions of the Federal Reserve System include serving as the central for the United States, supervising and regulating banking institutions and protect the credit rights of the consumers and strike a balance between private interests of banks and the centralized responsibility of government; managing the nation's money supply through monetary policy to achieve the sometimes-conflicting goals of maintaining the stability of the financial system and contain systematic in financial markets and to provide financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.

Many of today's U.S. regulatory agencies like the Interstate Commerce Commission, the Food and Drugs Administration and the Federal Trade Commission, to break up trade monopolies were created under Wilson Administration. The break up of the monopoly of Standard Oil was a major success in this regard.

Taking his cue from developments during the "Progressive Era", Henry Ford, in 1913, offered a very generous wage of $5 a day, to his workers. He argued that a mass production economy could not survive if average workers could not buy the goods produced. However, the wage increase did not extend to women. Ford expanded the company's Sociological Department to monitor his workers and ensure that they did not spend their new found bounty on "vice and cheap thrills."

First World War (1914-1919)

The US remained neutral at the start of the war and exported its products to meet the war time demand of both sides and made money. However, in 1917 Germany adopted a policy of unrestricted submarine warfare and sank American ships carrying supplies of Britain and her allies. This led to a final break of relations with the Central Powers. President Woodrow Wilson requested the Congress to declare war on Germany, which it did on April 6, 1917. World War I brought the US out of its political isolation to the world stage and established it as a world power. The export of arms and other items to the war ravaged nations also helped to develop its economy. Electrification started as an industry in 1900. But like many consumer industries, its growth slowed down during the war.

Roaring Twenties (1920 -29)

The Roaring Twenties was an era of great economic prosperity that was driven by consumerism. It saw the introduction of a wide array of new consumer goods. The decade saw North America becoming the richest region on the earth, with industry aligned to mass production, and a society with a culture of consumerism.

At the end of World War I, soldiers returned to the United States with money in their pocket. There were many new products on the market on which to spend. During the 1920s, mass production allowed for cheaper prices. Most of the devices that became commonplace in this decade had been developed before the war, but had been unaffordable to the majority. The growth of automobile, movie, radio, and chemical industries skyrocketed during the 1920s. One of the most important of these was the automobile industry. Before the war, cars were a rare luxury. In the 1920s cheap mass-produced vehicles became common throughout North America. By 1927, Henry Ford had sold 15 million Model T cars. In all of Canada, there were only about 300,000 vehicles registered in 1918, but by 1929 there were 1.9 million. The automobile had wide effects on the economy and society. The automobile industry rapidly became one of the largest industries. A number of peripheral companies for producing gasoline, running gas stations, and motels also came and provided employment.

The new technologies led to an unprecedented need for new infrastructure. These were mostly built by the government. Crucial to the new vehicles were new roads. Several roads were upgraded to become highways, and a number of expressways were constructed. Electrification had slowed during the war. By 1929 about 80 percent of power used in industry was electric instead of coal. Electric power with central electricity generating stations using steam turbines greatly lowered the cost of power. Businesses and houses in cities became electrified. Electric street railways developed into a major mode of transportation, and electric inter-urban service connected many cities in the northeast and mid-west. Vast new power plants were constructed. Telephone lines also were now being strung across the continent. Another important technology that went from rare to common in the 1920s was indoor plumbing. Modern sewer systems were installed for the first time in many regions.

These infrastructure programs were mostly left to the local government. During the 1920s, most local governments went deeply into debt, under the assumption that an investment in such infrastructure would pay off in the future. This would cause major problems in the Great Depression.

Urbanization was one of the most important trends during the Roaring Twenties. For the first time, more Americans lived in cities than in small towns or rural areas. Mass transit systems, the first skyscrapers, and the growing importance of industry made this possible. The service sector was also increasing with the finance and insurance industries doubling or tripling in size. The basic pattern of the modern white collar job is often believed to have been established during this period. Many of the clerical jobs went to women, who entered the workforce in unprecedented numbers.

The roaring 20 s also brought a change in role of women. The working woman reached equality with men while simultaneously possessing the appeal of the femme fatale. Pantsuits, hats and canes gave women a sleek look Thus the Roaring Twenties gave a new definition to womanhood. The new woman smoked and drank in public, danced and exercised her franchise, kept her hair short, wore make-up, dressed differently, and confidently participated in economic activities.

The Administration ended the high wartime taxes. Secretary of the Treasury raised the tariff, cut other taxes, and used the large surplus to reduce the federal debt by about a third from 1920 to 1930. Efforts were made to introduce efficiency, by regulating business practices. Unfortunately, farmers never recovered from the wartime bubble in land prices. Millions migrated to nearby cities.

Wall Street Crash of 1929

The economy was booming. Then suddenly economic disaster struck in October 1929. The stock markets crashed. The market had been on a six year Bull run that saw the Dow Jones Industrial Average increase fivefold in value. The Dow peaked at 381.17 on September 3, 1929. On October 24 ("Black Thursday"), the market lost 11 percent of its value at the opening bell on very heavy trading. Some big financers tried to halt the slide by aggressive buying in an effort to repeat the strategy that ended the "Panic of 1907". But it did not work. On Monday, October 28, more investors decided to get out of the market, and the slide continued with a record 13 percent loss in the Dow. The next day, October 29, 1929, about 16 million shares were traded, and the Dow lost an additional 12 percent. The market continued to fall arriving at an interim bottom on November 13, 1929 with the Dow closing at 198.60. The market recovered for several months reaching a secondary closing peak of 294.07 on April 17, 1930 before embarking on another, much longer, slide from April 1931 to July 1932 when the Dow closed at 41.22, its lowest level of the 20th century. It would not return to the peak of September 1929 until November 1954.

Great Depression and After (1930-1939)

The economy plunged into the "Great Depression" after the stock market crash. The Great Depression had devastating effects in virtually every country. Personal incomes, tax revenues, profits and prices dropped. International trade plunged by more than 50 percent. Unemployment in the United States rose to 25 percent. In some countries, it rose as high as 33 percent. Industrial cities were hit hard. Construction was virtually halted. Farming and rural areas suffered as crop prices fell by approximately 60 percent. Businesses and families defaulted on record numbers of loans. More than 5,000 banks failed. Hundreds of thousands of Americans found themselves homeless, and began congregating in shanty towns that began to appear across the country. The Federal Reserve did not make any effort to intervene by helping banks. The money supply fell by one third, and it was hard to get a loan. In his last year as president, Herbert Hoover ordered a massive tax increase to boost sagging federal revenues, and signed the protectionist Smoot-Hawley Tariff Act to reduce imports. Canada, Britain, Germany and other trading partners retaliated by increasing taxes on America exports. Economists generally agree that these measures deepened an already serious crisis. President Hoover and Congress also approved the Federal Home Loan Bank Act to facilitate home loans and mortgages, to spur new home construction, and reduce foreclosures. The Act had little effect. The final attempt of the Hoover Administration to stimulate the economy was the passage of the Emergency Relief and Construction Act (ERA) which provided funds for public works programs such as dams and the creation of the Reconstruction Finance Corporation (RFC) in 1932. The RFC's initial goal was to provide government secured loans to financial institutions, railroads and farmers. Nothing worked. Quarter by quarter the economy went downhill, as prices, profits and employment fell.

Recovery

Franklin D Roosevelt was elected President in 1932. After he took office, there began a steady, sharp upward recovery that persisted until the brief Recession of 1937-1938. Thereafter, the recovery again continued its upward climb. His first step was to declare a five day banking holiday and stabilize the banking system. Next he initiated the New Deal, which was a series of economic programs implemented between 1933 and 1936. Government spending increased from 8.0 percent of GNP under Hoover in 1932 to 10.2 percent of GNP in 1936. While Roosevelt balanced the "regular" budget, the emergency budget that funded the New Deal was funded by debt, which increased from 33.6 percent of GNP in 1932 to 40.9 percent in 1936. There are different views on extent to which the government spending for relief and public works helped to revive the economy. The economy had got back on track by 1934, and made a full recovery by 1936. But Roosevelt maintained that one third of the nation was ill fed, ill housed and ill clothed. The economy grew 58 percent from 1932 to 1940. The unemployment rate fell from 25.2 percent in 1932 to 13.9 percent in 1940 when the draft started. However, the Republicans considered many measures in the New Deal to be anti business. Before the war, the French and the British were realizing that they could no longer compete with United States industry in an open marketplace. The British had created their own economic bloc to shut out American goods.

Recession of 1937-1938

In the spring of 1937, American industrial production exceeded that of 1929 and remained level until June 1937. Then, the Roosevelt administration cut spending and increased taxation in an attempt to balance the federal budget and reduce deficit. The American economy then took a sharp downturn that lasted for 13 months through most of 1938. Industrial production fell almost 30 per cent within a few months and production of durable goods fell even faster. Unemployment jumped from 14.3 percent in 1937 to 19.0 percent in 1938. Manufacturing output fell by 37 percent from the 1937 peak and was back to 1934 levels. As unemployment rose, consumers' expenditures declined, leading to further cutbacks in production. By May 1938 retail sales began to increase, employment improved, and industrial production went up after June 1938.

The GNP of the U.S. in 1929 was 101 billion dollars. It fell to 68 billion dollars in 1933 and recovered to 103 billion dollars in 1938. The Index for industrial production was 109 in 1929. It fell to 69 in 1933 and reached 112 in 1937 but fell to 89 in 1938. Exports which were 5.24 billion dollars in 1929 fell to 1.67 billion dollars in 1933 rose to 3.18 billion dollars in 1938. Unemployment was only 3.1 percent in 1929 but rose to 25.2 percent in 1933 and remained at a high of 16.5 percent in 1938.

Second World War 1940 - 45

During the war the economy operated under so many different conditions that it is impossible to compare it with peacetime. There was massive government spending, price controls, bond campaigns, controls over raw materials, prohibitions on new housing and new automobiles, rationing, guaranteed cost plus profits, subsidized wages, and the draft of 12 million soldiers. The United States produced great quantities of ships, airplanes, vehicles, armaments, machine tools, chemicals, and so on. The economy grew 56 percent from 1940 to 1945 in 5 years of wartime.

US Takes Control of World Economy 1946 - 69

This era is also known as the Golden Era of American Capitalism. The United States had remained untouched by the ravages of World War II and had built a thriving manufacturing industry and grown wealthy selling weapons and lending money to the other combatants. In fact, its industrial production in 1945 was more than double that of annual production between the prewar years of 1935 and 1939. In contrast, Europe and East Asia were economically shattered. The United States held most of world's investment capital, industrial production and exports. In 1945, it produced half the world's coal, two-thirds of the oil, and more than half of the electricity power. It held 80 percent of the world's gold reserves. The United States started with initial economic advantage, consolidated it during and after the war and assumed leadership of the capitalist world.

Before World War II, the world had been economically dominated by Britain. After the war, the United States became the leading economic power. A devastated Britain had little choice. Two world wars had destroyed the country's principal industries that paid for the import of half the nation's food and nearly all its raw materials except coal. The British had no choice but to ask for aid. In 1945, the United States agreed to a loan of $ 3.8 billion in return for market access and trade concessions. Charles de Gaulle, the French President and the leading voice of French nationalism, was forced to grudgingly ask the United States for a billion dollar loan. In return France promised to curtail government subsidies and currency manipulation that had given its exporters advantages in the world market. The Soviet hegemony in Eastern Europe provided the foundation for a separate international economic system. But the Soviets never threatened the US economic hegemony.

After the war, United States experienced rapid industrial growth and capital accumulation. Federal taxes on incomes, profits and payrolls which had risen to high levels during World War II were cut back slowly. The middle class swelled. So did the GDP and productivity. This growth was distributed fairly evenly across the economic classes. Some attribute this to the strength of the labor unions whose membership peaked during the 1950s. Much of the growth came from the movement of low income farm workers into better paying jobs in the towns and cities. This process was largely completed by 1960. Congress created the Council of Economic Advisors (CEA) to promote high employment, high profits and low inflation. The Eisenhower administration (1953–1961) supported an active economic approach that helped to establish Keynesianism as a bipartisan economic policy for the nation.

As the world's greatest industrial power, and one of the few nations un-ravaged by the war, the United States stood to gain more than any other country from the opening the entire world to unfettered trade. Its capitalism could not survive without markets and allies. The United States got what it wanted through the "Benton Wood" systems for the world economy. Its dollar replaced the British pound as the world's trading currency. President Franklin D. Roosevelt saw the creation of the postwar order as a way to ensure continuing prosperity for his country. The American economy remained very strong for the 24 years from 1949 to 1973.

President Lyndon B Johnson (1963–69) took over a roaring economy. He dreamed of creating a "Great Society". Two main goals of the Great Society social reforms were the elimination of poverty and racial injustice. New major spending programs that addressed education, medical care, urban problems, and transportation were launched during this period. The government financed some of private industry's research and development throughout these decades, most notably ARPANET which would become the Internet. However, the expenditure on Vietnam War and other cold war strategies began to affect the economy.

Turbulent Years (1970-2000)

The economy remained stable until the 1970s, when the United States suffered stagflation. President Richard Nixon took the United States off the gold standard, and further government attempts to revive the economy failed. As the decade progressed, the situation worsened. In November 1980, Robert G. Anderson wrote, "the death knell is finally sounding for the Keynesian Revolution."

Richard Nixon 1969-1974

Richard Nixon became President in 1969. It was during his presidency that Neil Armstrong became the first to walk on the moon. Inflation was at 4.7 percent, its highest rate since the Korean War. The expenses towards the Great Society enacted under President Johnson together with the Vietnam War costs, were causing large budget deficits. There was little unemployment, but interest rates were at their highest in a century. Nixon's major economic goal was to reduce inflation. The most obvious means of doing so was to end the war. This could not be done overnight, and the US economy continued to struggle through 1970.

Nixon proposed larger federal grants to the states, but these proposals were rejected by the Congress. In 1970, Congress had granted the President the power to impose wage and price freezes. This was temporarily introduced in 1971. He also allowed the dollar to float against other currencies, and ended the convertibility of the dollar into gold. Nixon's policies dampened inflation through 1972, although their aftereffects contributed to inflation during his second term and into the Ford administration. After he won reelection, Nixon found inflation returning. He re-imposed price controls in June 1973. The price controls became unpopular with the public and businesspeople, who saw powerful labor unions as preferable to the price board bureaucracy. The controls produced food shortages, as meat disappeared from grocery stores and farmers drowned chickens rather than sell them at a loss. Despite the failure to control inflation, controls were slowly ended 1974. 1973 onwards the rate of growth began to slow down. The long and costly Vietnam War and the military expenditure in pursuit of the "Cold War" around the world had weakened the US dollar and forced President Nixon to leave the gold standard in 1971.

In 1973, the Organization of Oil Producing Countries (OPEC) reduced supplies of oil to the world market in retaliation to American military assistance to Israel during the third Arab Israel War. This oil crisis forced oil prices to rise sharply, spurring inflation throughout the economy and slowing growth. The US government imposed price controls on gasoline and oil. This caused shortages and long lines for gasoline. The price controls on gasoline were lifted after a few years, although oil controls remained until the Regan Presidency. President Ford, who succeeded President Nixon after the Watergate scandal was not been able to turn round the US economy.

Gerald Ford 1974-77

Nixon resigned in 1974 after the Watergate scandal and was succeeded by Gerald Ford. Inflation persisted and was the major target of his administration. To check it he asked the American people to reduce their spending and consumption. But unemployment was rising and this policy did not boost employment. The country sank into a mild recession in 1974 and unemployment rose to 7.4 percent. To tackle it he proposed a $16 billion tax break to simulate growth. This tax break which was increased to over $ 22 billion increased the government's budget deficit but did nothing to generate employment. In 1975, New York City was on the verge of bankruptcy. Presided Ford did give a federal loan to the city after initially refusing to do so.

Jimmy Carter 1977-81

On assuming office in 1977, President Carter inherited an economy in trouble. He had severely criticized former President Ford for his failures to control inflation and relieve unemployment. Carter tried to revive the economy through various measures. He created the Department of Energy and introduced measures to reduce oil consumption. He encouraged use of renewable energies. However, there was another energy crisis in 1979 accompanied by steep rise in oil prices. Carter reinstated price controls on gasoline. He appointed Paul Volker as Chairman of the Federal Reserve in 1979. Volker pursued a tight monetary policy to bring down inflation. He succeeded, but the economy slowed and unemployment rose. Carter also faced a drastic erosion of the value of the U.S. dollar in the international money markets. Many analysts blamed the decline on a large and persistent trade deficit, much of which was a result of U.S. dependence on foreign oil. In 1980, Carter announced a gradual deregulation of the oil price controls, along with the imposition of a Windfall Profit Tax on domestic oil production. The tax was repealed in 1988, when Congress agreed that the tax had discouraged investment in domestic oil production and increased US dependence on foreign oil.

Both inflation and unemployment were considerably worse in 1979 than at the time of Carter's inauguration. By May 1979, unemployment had begun rising again. It jumped sharply to 6.9 percent in April 1980 and to 7.5 percent in May 1980. An economic downturn from January to July 1980 kept unemployment at historically high levels (about 7.5 percent) through the end of 1981.The annual inflation rate rose from 4.8 percent in 1976 to 6.8 percent in 1977, 9 percent in 1978, 11percent in 1979 and hovered around 12 percent at the time of the 1980 election campaign. Although Carter had pledged to eliminate federal deficits, the deficit for the fiscal year 1979 was about $27 billion and that for 1980 touched $66 billion. By the time of the election campaign in 1980, approximately 8 million people were out of work. The unemployment rate had leveled off to a nationwide average of about 7.7 percent but it was considerably higher in some industrial states. The prime interest rate hit 21.5 percent in December 1980, the highest rate in U.S. history under any President. Investments in fixed income (both bonds and pensions being paid to retired people) were becoming less in value. The high interest rates and the 1979 energy crisis led to a sharp recession in the early 1980s. Several key industries including housing, steel manufacturing and automobile production experienced a downturn from which they did not recover till 1985. Many of the economic sectors that supplied these basic industries were also hard hit. To revive the economy, Jimmy Carter ushered in deregulation of the economy and set in motion a big defense buildup in 1980. But it came too late to help him get a second term.

Ronald Regan 1981-89

Ronald Regan was the president of United States from 1981 to 1989. He owed his election to the economy. Ronald Reagan was of the opinion that "government is not the solution to our problem, government is the problem." Reagan and his neo-liberal economic advisors began a program of 'supply-side economics' where the administration cut taxes and spending, and reduced regulations and gave a free hand to businesses. The Regan Administration introduced the largest tax cuts in American history and reduced the role of the government. The economic policies enacted by him in 1981, known as "Reganomics". The policies aimed to reduce the growth of government spending and increase economic growth through tax cuts (under Reagan, the top personal tax bracket dropped from 70 percent to 28 percent in seven years). The Regan Administration continued vigorously with deregulation on corporate activity started by Carter in 1980. Regan also drastically increased defense spending. The first two years of the Regan Presidency brought little success to his efforts in improving the economy. Volker continued as the Chairman of the Federal Reserve under Regan for some time till he was replaced by Alan Greenspan and continued with his tight money policy. The Federal Reserve's extremely tight monetary policy plunged the American economy into a deep recession. Employment conditions deteriorated throughout the year. The unemployment rate in the U.S. reached 10.8% in December 1982, higher than at any time in post war era. Job cuts were particularly severe in housing, steel and automobiles sectors. Twelve million people were unemployed, an increase of 4.2 million people since July 1981. Unemployment rates for every major group reached post-war highs, with men age 20 and over particularly hard hit.

The Depository Institution Deregulation and Monetary Control Act (DIDMCA) of 1980, passed during the Cater Presidency, had phased out a number of restrictions on banks' financial practices, broadened their lending powers and raised the deposit insurance limit from $40,000 to $100,000. Banks rushed into real estate lending, speculative lending and other ventures just as the economy slowed. By mid 1982, the number of bank failures was rising steadily. Bank failures reached a post-depression high of 42 in one year as the recession and high interest rates took their toll. By the end of the year, the Federal Deposit Insurance Corporation (FDIC) had spent $870 million to purchase bad loans in an effort to keep various banks afloat.

In July 1982, the Republican dominated Congress further deregulated banks and "Savings and Loans Institutions" (S&Ls). They passed an act that authorized banks to begin offering money market deposit accounts in an attempt to encourage deposit inflows. They also removed additional statutory restrictions in real estate lending, and relaxed limits of loans to one borrower. The legislation encouraged a rapid expansion in real estate lending at a time when the real estate market was collapsing, worsened competition between banks and savings and loans industry. The recession affected the banking industry long after the economic downturn technically ended in November 1982. In 1983, another 49 banks failed, easily beating the Great Depression record of 43 failures set in 1940. The FDIC listed another 540 banks as "problem banks" on the verge of failure. The Continental Illinois National Bank and Trust Company, the nation's seventh-largest bank with $45 billion in assets, failed in 1984. The FDIC had long known of Continental Illinois' problems. But Federal regulators were reassured by Continental Illinois executives that steps were being taken to ensure the bank's financial security. After Continental Illinois' collapse, federal regulators were willing to let the bank fail in order to encourage other banks to rein in some of their more risky lending practices. But members of Congress and the press felt Continental Illinois was "too big to fall". In May 1984, federal banking regulators were forced to offer a $4.5 billion rescue package to Continental Illinois. Continental Illinois may not have been "too big to fail," but its collapse could have caused the failure of some of the biggest banks in the United States. The American banking system had been significantly weakened by the severe recession and the effects of deregulation. Had other banks been forced to write off loans to Continental Illinois, institutions such as Bank of America and perhaps Citicorp would have also failed.

However, in 1982, the economy declined into the worst recession in 40 years. The "Reagan Recession," coupled with budget cuts (which were enacted in 1981 but began to take effect in 1982), led many voters to believe that Reagan was insensitive to the needs of average citizens. Reagan's approval ratings sank. In January 1983, Reagan's popularity rating fell to 35 percent, approaching levels experienced by Richard Nixon and Jimmy Carter at their most unpopular moments. Pressured to counteract the increased deficit caused by the recession, Reagan agreed to a corporate tax increase in 1982. However, he refused to raise income taxes or cut defense spending. The 1982 mid term Congressional elections were largely viewed as a referendum on Reagan and his economic policies. The election results proved to be a major setback for Reagan and the Republicans. The Democrats gained 26 House seats. However, the net balance of power in the Senate remained unchanged. The mid-term Congressional elections proved to be the nadir of the Reagan presidency.

A combination of falling oil prices, deficit spending and the lowering of interest rates slowly led to economic recovery in the next two years. From a high of 10.8 percent in December 1982, unemployment gradually improved until it fell to 7.2 percent on Election Day in 1984. Nearly two million people left the unemployment rolls. Inflation fell from 10.3 percent in 1981 to 3.2 percent in 1983. Corporate earnings rose by 29 percent in the July-September quarter of 1983, compared with the same period in 1982. Some of the most dramatic improvements came in industries hardest hit by the recession such as paper and forest products, rubber, airlines, and the auto industry. By November 1984, voter anger at the Regan Administration had evaporated. Reagan was re-elected by a thumping margin in 1984. Reagan himself left office with a 64 percent approval rating, one of the highest approval ratings of departing presidents. By the end of Reagan's term, the economic situation began to rebound, and the United States had economic growth without inflation, and the unemployment rate began to fall.

Savings and Loans Crisis

The Savings and Loans Crisis, one of the largest financial scandals in U.S. history, started during the Regan Presidency. A Savings and Loan (S&L) Association or "thrift" was a financial institution that accepted savings deposits and made mortgage, car and other personal loans to individual members. In 1980, there were approximately 4,590 state and federally registered "Savings and Loan Institutions" (S&Ls) with total assets of $616 billion. Beginning in 1979, S&Ls began losing money due to high interest rates. Net S&Ls income, which totaled $781 million in 1980, fell to a loss of $4.6 billion in 1981. A further loss of $4.1 billion in 1982 meant that the entire net worth of the entire S&L industry was virtually zero.

The passing of the Economic Recovery Tax Act of 1981 (ERTA) in August 1981 allowed S&Ls to sell their mortgage loans and use the cash generated to seek better returns. The losses created by the sales were to be amortized over the life of property loans, and any losses could also be offset against taxes paid over the preceding 10 years. This all made S&Ls eager to sell their loans. The buyers, major Wall Street firms, were quick to take advantage of the S&Ls' lack of expertise. They bought at 60 to 90 percent of the actual value and then transformed the loans by bundling them as government-backed bonds (by virtue of Freddie Mac or Fannie Mae guarantees). S&Ls were one group buying these bonds and held $150 billion of them by 1986.

In 1982, the Garn-St Germaine Depository Institutions Act was passed. It increased the proportion of assets that S&Ls could hold in consumer and commercial real estate loans and allowed "thrifts" to invest 5 percent of their assets in commercial loans until January 1, 1984, when this percentage increased to 10 percent. When inflation was controlled and property prices fell, a large number of S&L customers' defaulted and bankruptcies ensued. The S&Ls that had overextended themselves were forced into insolvency proceedings themselves.

The Federal Savings and Loan Insurance Corporation (FSLIC), a federal government agency that insured S&L accounts in the same way the Federal Deposit Insurance Corporation that insures commercial bank accounts, then had to repay all the depositors whose money was lost. From 1986 to 1989, FSLIC closed or otherwise resolved 296 institutions with total assets of $125 billion. An even more traumatic period followed, with the creation of the Resolution Trust Corporation in 1989. The agency closed or resolved an additional 747 out of about 3400 "thrifts" by the middle of 1995.

The main causes of the crisis are given below:

S&L Associations gained a wide range of new investment powers in 1980 with the passage of the Depository Institution Deregulation and Money Control Act and the Garn-St. Germaine Depository Institution Act. A number of states also passed legislation that similarly increased investment options. This gave them many of the capabilities of banks, without the same regulations as banks.

In an effort to take advantage of the real estate boom (outstanding U.S. mortgage loans: 1976 $700 billion; 1980 $1.2 trillion) and high interest rates of the late 1970s and early 1980s, many S&Ls lent far more money than was prudent, and to ventures which many S&Ls were not qualified to assess, especially regarding commercial real estate. (Investing more money than was prudent was to surface again in the Sub Prime Crisis of 2008 and Spanish banking crisis of 2008-2011.)

Deregulation of "Brokered Deposits" or deposits brought in to S&Ls by brokers who are paid a commission by the customer to find the best rates was another reason for the crisis. Previously, banks and "thrifts" could only have five percent of their deposits be brokered deposits. This limit was lifted. Thus, a small one-branch thrift could attract a large number of deposits simply by offering the highest rate. To make money off this expensive money, it had to lend at even higher rates, meaning that it had to make more, riskier investments.

The net worth regulations of S&Ls was wholly inadequate. Many of the failed S&Ls were excessively leveraged.

Fraud and insider transaction abuses were also common. Political corruption was also a part of the S&L Crisis.

A change in FSLIC rules reducing the minimum number of stockholders of an insured association from 400 to one. This encouraged fly by night operators to come to the party.

There was overbuilding in multifamily, condominium type residences and in commercial real estate in many cities. In addition, real estate values collapsed in the states of Texas, Louisiana and Okalahoma particularly due to falling oil prices and weakness in the mining and agricultural sectors of the economy.

The Savings and Loans Crisis took place because S&L deposits were insured by the Federal Savings and Loan Insurance Corporation (FSLIC), and S&L regulations were loosened by the Regan administration. The Associations were encouraged to engage in increasingly risky activities, including commercial real estate lending and investments in junk bonds. The depositors continued to put money into these risky institutions. When real state prices collapsed, the borrowers defaulted on mortgages and went bankrupt. Many of the under capitalized S&Ls also collapsed.

George H W Bush 1989-1993

Early into his term, President Bush faced the problem of what to do with the leftover public debt (cumulative budget deficit) spawned by the Reagan years. The deficit had grown three times its size to $220 billion since 1980. Bush was firm on curbing the deficit. He tried to persuade the Democrat controlled Congress to cut government spending. The Democrats wanted to raise taxes instead and Bush was forced by the Democratic majority to raise tax revenues. As a result, many Republicans felt betrayed because Bush had promised "no new taxes" in his 1988 campaign. Bush failed to push through his proposed spending cuts due to opposition in the Congress from the Democrats. Near the end of 1990, the president and congressional members reached a compromise on a budget package that increased the marginal tax rate and phased out exemptions for high-income taxpayers. At this time, America entered into a mild recession that lasted for six months. Many government programs, such as welfare, increased. As the unemployment rate edged upward in 1991, Bush signed a bill providing additional benefits for unemployed workers. 1991 also saw many corporate restructuring which laid-off a substantial number of workers. By 1992, interest and inflation rates were the lowest in years, but by midyear the unemployment rate reached 7.8 percent, the highest since 1984. In September 1992, the Census Bureau reported that 14.2 percent of all Americans lived in poverty.

Bill Clinton 1993-2001

President Clinton decided to raise taxes to cap the cap budget deficit. Clinton signed the Omnibus Budget Reconciliation Act of 1993 which was passed by the Congress without a Republican vote. It cut taxes for fifteen million low-income families, made tax cuts available to 90 percent of small businesses, and raised taxes on the wealthiest 1.2 percent of taxpayers. With tax increases and through the implementation of spending cuts, he produced budget surpluses over a number of years. Clinton tried to legislate a healthcare reform plan which aimed at achieving universal coverage through a national health care plan. It was not passed in his time. In 1994, he signed the North American Free Trade Agreement into law. Throughout his first year in office, Clinton strongly supported free trade measures though there remained strong disagreement on the issue within the party. Opposition came chiefly from anti-trade Republicans, protectionist Democrats.

Under Bill Clinton's eight years of presidency, the economy expanded by 50 percent in real terms. Unemployment was down to a 40 year low. By the end of his tenure the US had a gross national product of $10 trillion. American economy had reached its peak.

The Age of Decline (2001-2011)

This period can be divided into eight years of Republican presidency of George W Bush Jr. (2000 -2008) and three years of Democratic presidency under Barrack Obama (2009-2011).

George W Bush 2001-2009

Bush was elected president in 2000, becoming the fourth president to be elected despite receiving less popular votes nationwide than his opponent. Eight months into Bush's first term as president, terrorists attacked targets in the U.S. In response, Bush declared the War on Terror and launched an international military campaign in Afghanistan against the Taliban. Bush went to war in Iraq in 2003 with disastrous consequences.

Bush took office during a period of economic recession in the wake of the bursting of the Dot-com bubble. The War on Terror also impacted the economy. The Bush administration increased federal government spending from $1.789 trillion to $2.983 trillion (a 70 percent increase). Discretionary defense spending was increased by 107 percent, discretionary domestic spending by 62 percent, Medicare spending increased by 131 percent, social security by 51 percent, and internal or homeland security spending by 130 percent. The increase in spending was more than under any predecessor since Lyndon B Johnson during the Vietnam War era.

President Bush inherited a budget surplus of $237 billion in fiscal year 2000. In 2001, Bush's economic advisors estimated that there would be a $5.6 trillion surplus over the next ten years. Bush announced tax cuts worth $1.35 trillion, one of the largest tax cuts in U.S. history. Federal Reserve Chairman Alan Greenspan warned of a recession. President Bush like all Republicans maintained that a tax cut would stimulate the economy and create jobs. Treasury Secretary Paul O'Neil opposed some of the tax cuts arguing that they would contribute to budget deficits and undermine Social Security. By 2003, the economy showed signs of improvement, though job growth remained stagnant. Another tax cut program was passed that year. The net result was that budget deficit and public debt increased over $500 billion each year since FY2003. By October 2008, due to reduced tax income and increases in spending, the national debt had risen to $11.3 trillion, an increase of over 100 percent from 2000 when the debt was only $5.6 trillion. Most debt was accumulated as a result of what became known as the "Bush tax cuts" and increased national security spending.

Under the Bush Administration, real GDP grew at an average annual rate of 2.5 percent, considerably below the average for business cycles since 1949. Bush entered office with the Dow Jones Industrial Average at 10,587, and the average peaked in October 2007 at over 14,000. When Bush left office, the average was at 7,949, one of the lowest levels of his presidency.

Unemployment originally rose from 4.2 percent in January 2001 to 6.3 percent in June 2003, but subsequently dropped to 4.5 percent as of July 2007. By the end of Bush's presidency, unemployment climbed to 7.2 percent. The poverty rate increased from 11.3 percent in 2000 to 12.3 percent in 2006 after peaking at 12.7 percent in 2004.

In December 2007, the United States entered its longest post World War II recession. The economic woes included a housing market correction, a sub-prime mortgage crisis, soaring oil prices and a declining dollar value. In February 2008, 63,000 jobs were lost, a five-year record. To ease with the situation, Bush signed a $170 billion economic stimulus package which was intended to improve the economic situation by sending tax rebate checks to many Americans and providing tax breaks for struggling businesses. But it did not help. In September 2008, the crisis became much more serious. Many economists and world governments felt that that the situation was the worst financial crisis since the Great Depression. In November 2008, over 500,000 jobs were lost, which marked the largest loss of jobs in the United States in 34 years. The Bureau of Labor Statistics reported that in the last four months of 2008, 1.9 million jobs were lost. By the end of 2008, the U.S. had lost a total of 2.6 million jobs.

The Bursting of the Dotcom Bubble 2002-2004

The dot-com bubble (also referred to as the Information Technology Bubble) was a speculative bubble that formed during the period 1995–2000. On March 10, 2000, the NASDAQ peaked at 5132 in intraday trading before closing at 5048 more than double its value a year earlier. On March 20, 2000, the NASDAQ lost more than 10 percent from its peak. Financial magazine Barron's shocked the market with its cover story "Burning Up". The article pointed out: "America's 371 publicly traded Internet companies have grown to the point that they are collectively valued at $1.3 trillion, which amounts to about 8 percent of the entire U.S. stock market." By 2001 the bubble was deflating at full speed. A majority of the dot-com companies ceased trading after exhausting their venture capital. Many of the companies having high share value had never made a net profit. The 9/11 terrorist destruction of the World Trade Centre's Twin Towers accelerated the stock market drop. The NYSE suspended trading for four sessions.

Several communication companies could not weather the financial burden and were forced to file for bankruptcy. One of the biggest players, World Com was found practicing illegal accounting practices to exaggerate its profits on a yearly basis. WorldCom's stock price fell drastically when this information went public, and it eventually filed the third-largest corporate bankruptcy in U.S. history. Many dot-com companies ran out of capital and were acquired or liquidated. Several companies and their executives were accused or convicted of fraud for misusing shareholders' money, and the Securities and Exchange Commission fined top investment firms like Citigroup and Merrill Lynch millions of dollars for misleading investors. Various supporting industries, such as advertising and shipping, scaled back their operations as demand for their services fell. A few large dot-com companies, such as Amazon.com and eBay survived the turmoil. Others such as Google have become industry-dominating mega-firms. The stock market crash of 2000–2002 caused the loss of $5 trillion in the market capitalization of companies from March 2000 to October 2002.

The Sub-Prime Crisis 2007- to date

The United States, the world's largest economy, entered 2008 with a housing market correction, a Sub Prime Mortgage crisis and a declining dollar. By January 2008, the world's largest banks had already admitted losing more than $100bn from mortgage related bonds and derivatives gone bad. The main sub prime losses reported in the third quarter of 2007 were by Citigroup: $18bn, UBS: $13.5bn, Morgan Stanley $9.4bn, Merrill Lynch: $8bn, HSBC: $3.4bn, Bear Stearns: $3.2bn, Deutsche Bank: $3.2bn, Bank of America: $3bn, Barclays: $2.6bn, Royal Bank of Scotland: $2.6bn, Freddie Mac: $2bn, Credit Suisse: $1bn, Wachovia: $1.1bn, IKB: $2.6bn, BNP Paribas: $197m _._ The chief executive of Citigroup, resigned in November after the full extent of Citigroup's Sub Prime Mortgage losses began to emerge. US bank JP Morgan Chase said its earnings for the last three months of 2007 fell 34 percent as a result of its exposure to soured US mortgage loans. The bank said it had to cut the value of investments linked to the US mortgage market by $1.3bn. Wells Fargo, the biggest bank on North America's West Coast, said the home loans crisis had led to its first drop in quarterly profits since 2001and reported a 38 percent decline in net income to $1.36bn for the last three months of 2007. Wall Street banking giant Merrill Lynch unveiled a huge loss for 2007 and was crippled by exposure to risky investments in the US housing market. The losses included a massive $14.1bn write down on failed investments related to Sub Prime Mortgages. Merrill Lynch was the last big bank to reveal losses related to the crisis in the US mortgage market. In the last three months of 2007 alone, Merrill Lynch chalked up losses of $9.83bn, the biggest quarterly loss in its history. Its chief executive stepped down in October because of the bank's poor performance. BBC Business Editor Robert Peston said that Merrill Lynch had avoided bankruptcy because of lifesaving capital injection from the cash rich economies of Asia and the Middle East.

Other Financial Services like mortgage companies and bond insurers were also in trouble. The sub-prime (mortgage) market of the US was focused on providing home loans to those with limited or poor credit histories. Many of these mortgages were converted into financial instruments and sold to investors including banks and investment banks in the US and all around the world. But after 2005, rising unemployment and under employment meant that many sub-prime borrowers could no longer make their monthly payments. This led to defaults and a steep fall in the value of investments linked to sub-prime loans. Many banks had to report massive losses. As a result many mortgage companies in the US, Europe and UK came close to bankruptcy. The largest mortgage company in the US, Countrywide was taken over by Bank of America while the British Government poured billions of pounds of taxpayer's money into the British Bank, Northern Rocks, to save it from going bankrupt. Bond insurers were also in trouble. Analysts at Barclay's Capital said banks own $820bn of securities guaranteed by bond insurers. After insuring debt hit by the Sub Prime Mortgage crisis, bond insurers, such as Ambac Financial Group and MBIA, have suffered billions of dollars of write-downs.

Barack Obama 2009 to Date

Barack Obama took over as president on January 20, 2009 in the midst of the Sub-Prime crisis and the worst recession in American history since the Great Depression.

On February 17, 2009, Obama authorized a $787 billion economic stimulus package in February 2009 to help the economy recover from the deepening world wide recession. The Act provided for increased federal spending on health care, infrastructure, education, and various tax breaks, incentives and direct assistance to individuals. In March, Obama's Treasury Secretary, Timothy Geithner, introduced the Public-Private Investment Program for Legacy Assets, which contained provisions for buying up to $2 trillion in depreciated real estate assets. Obama intervened in the troubled automotive industry in March 2009. He renewed loans for General Motors and Chrysler and set terms for both firms' bankruptcies, including the sale of Chrysler to Italian automaker Fiat and reorganization of General Motors giving the U.S. government a temporary 60 percent equity stake in the company. In June 2009, dissatisfied with the pace recovery, Obama called on his cabinet to accelerate domestic investment. He signed into law the Car Allowance Rebate System to encourage people to sell old cars and buy new ones. The scheme was known colloquially as "Cash for Clunkers". In 2010, Obama passed a one year pay roll tax reduction. His efforts temporarily boosted the economy.

Budget deficit now became a cause for worry. Obama and the Congressional Budget Office calculated that the 2010 budget deficit would be $1.5 trillion or 10.6 percent of the nation's GDP. In the mid term elections in 2012, the Republicans took control of the House of Representatives. It thus became impossible for Obama to roll back the "Bush Tax Cuts" and he was forced to extend the tax cuts for two years. In 2011, the administration predicted the deficit will shrink marginally to $1.34 trillion, while the 10-year deficit will increase to $8.53 trillion or 90 percent of GDP. The most recent increase in the U.S. debt ceiling to $16.4 trillion was signed into law on January 26, 2012 after a lengthy congressional debate over whether to raise the nation's debt limit. By passing the legislation, Congress was able to prevent an unprecedented default by the U.S. government on its obligations including bond redemptions.

The unemployment rate rose in 2009, reaching a peak in October at 10.1 percent. The unemployment rate fell to 8.1 percent by the end of 2011.

GDP growth turned positive in the third quarter of 2009, expanding at a rate of 1.6 percent. Growth continued in 2010, posting an increase of 3.7 percent in the first quarter, with lesser gains throughout the rest of the year. In July 2010, the Federal Reserve indicated that although economic activity continued to increase, its pace had slowed. Fed Chairman Ben Bernake admitted that the economic outlook was uncertain. Overall, the economy expanded at a rate of 2.9 percent in 2010. Obama's efforts to reduce defense expenditure by withdrawing troops from Iraq also helped.

Obama's efforts at reviving the economy after the Sub-Prime Crisis have arrested the downward slide and ended the recession. But given the fundamental problems in the U.S. and European economies, the difficulties are far from over.

Conclusion

There is no doubt that the great American Spirit, its risk taking ability, its enterprising population and innovativeness has contributed greatly to America's economic growth. But the open minded and discerning will admit that that the foundation of this growth lay in usurping the entire land of the country by driving off the Native Indian population into reservations. Profitable plantations were developed on the land so usurped with free slave labor and European capital. That was the initial capital of the U.S.

Trans-Atlantic Slave Trade lasted for over three and a half centuries from 1502 to 1859. United States participated vigorously in the slave trade and benefited from it. African slaves were extensively used in the Southern States in cotton and tobacco plantations. About 4 million African slaves toiled day and night without remunerations on American farms and contributed to American wealth. In the year 1758 Virginia exported 35,000 tons of tobacco, all grown with slave labour. The last recorded slave ship to land on American soil was the Clotilde, which, in 1859, illegally smuggled a number of Africans into the town of Mobile in Alabama. The Africans on board were sold as slaves. The United States passed the Slave Trade Act of 1794, which prohibited the building or outfitting of ships in the U.S. for use in the slave trade. In 1807, United States outlawed the import of slaves into United States. United States was the last country to abolish slavery in 1864 after the end of the American Civil War. So important was slave labor to the economy of the Southern States that they fought a civil war to preserve their right to employ slaves on their plantations and in their homes. Can any American or European economist calculate the wealth generated by the slave trade, taxes on the sale of slaves and the productivity of over 4 million African slaves and their progenies who worked on the plantations and homes without any remuneration for a period of over 350 years? Can any economist work out the capital saved by American farmers and businessmen by usurping Native Indian land without payment?

The founding fathers built upon this foundation by adopting the "American System", an economic system based on Mercantilism that used high tariff to protect and nurture American industry. It is this emphasis on development of indigenous industries that enabled it to overtake Europe as the most industrialized nation. American wealth reached its peak immediately after the World War II due to money earned from its exports to a devastated Europe and Japan.

But things began to change after 1969. The fact that it was the world's largest economic and military power went into its head. The United States considered itself too big to fall. Cold War and perpetuating American hegemony, rather than preserving the prosperity of the American people and protecting the American manufacturing industries, became the priority of the American administration. Social reforms of the "New Deal" and "The Great Society" were partly overturned. American manufacturing was first shifted to Japan, then to the Asian Tiger nations like South Korea, Taiwan, Malaysia, Thailand and finally to China, India, Vietnam etc to benefit corporate America. From the world's top creditor in 1945, the United States has become the world's largest debtor nation.

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Chapter 4: Impoverishing of Nations

What constitutes wealth of a nation? We have seen in Chapter 1, an economy consists of institutions and people. Institutions include central governments, state or provincial governments, public institutions like public schools and colleges, municipalities', public hospitals etc and private institutions like private schools and colleges, private hospitals and various other private businesses, large and small. The wealth of the people and institutions are different. The constraints to budgeting, borrowing and spending by these institutions are different. If we consider that the wealth of a nation is the sum total of the wealth of its people and its institutions, then the concepts of "Mercantilism" and the "American Way" become relevant. Then it becomes desirable that the capital account of a country remains positive and more wealth flows into the country than what flows out. As per the CIA Fact Book, the U.S. had a current account deficit of about $ 600 billion in 2010. The European Union had an over all deficit of $ 32 billion. This was due to surpluses of Germany, Netherlands, Switzerland and the Scandinavian countries. The countries with the largest deficits were Spain $ 61 billion, U.K. $ 66 billion, France $ 72 billion and Italy $ 74 billion. It will be clear from above that over $ 600 billion is flowing from the developed countries to the developing countries. It should not be difficult to calculate whether the developed nations are getting richer.

If, like Adam Smith and the neo-liberals, we focus only on the wealth of the investors of the country, then the concepts of "Mercantilism" and "the American way is thrown overboard and "Globalization" and economic liberalization takes over. The governments, public institutions and the ordinary people of the developed world become poorer while the rich investors and corporations of the developed world become richer.

United States

Central Government Budget and Debt

The budget of any nation is prepared by the government in power. Most governments around the world spend more than what they earn through various taxes and duties. The shortfall is usually made up by government borrowing or simply printing more money. Government borrowing is normally in the form of selling "Treasury Securities". These bonds can be purchased by individuals and institutions within and outside the country. When government borrowings reach close to the GDP alarm bells begin to ring. In some cases, a government can be faced with default or be unable to pay back its debt. This damages their credit rating of the country and makes it difficult and more costly for governments to borrow more money to keep the governments running. The Public Debt is the cumulative accumulation of budget deficits. In emergencies, the budget of countries may be balanced with loans from World Bank or IMF.

Federal Budget Deficit

The annual "Budget deficit" is the difference between income and budgeted spending of the Federal Government during a given fiscal year. Since 1970, the U.S. Federal Government has spent more than its income for all but four years, 1998 to 2001under President Clinton. The deficit for 2010 was an unprecedented 1.294 trillion dollars.

Public Debt

Public Debt is the cumulative budget deficit of the government at any given time. The United States has had a public debt since its founding in 1791. Debts incurred during the American War of Independence amounted to about $75 million on January 1, 1791. From 1796 to 1811 there were 14 budget surpluses and 2 deficits and much of the debt was paid back. There was a sharp increase in the debt as a result of the War of 1812. In the 20 years following that war, there were 18 surpluses and the US paid off 99.97 percent of its then debt. There was another sharp increase in the debt due to the Civil War. The public debt rose from $65 million in 1860 to $2.7 billion by the end of the war. During the following 47 years up to 1910, there were 36 surpluses and 11 deficits and 55 percent of the public debt was paid off. Another major increase took place during World War I. It reached $25.5 billion at its end. It was followed by 11 consecutive surpluses and saw the debt reduced by 36 percent by 1930. Social programs enacted during the Great Depression and the buildup and involvement in World War II during the F.D. Roosevelt and Truman presidencies in the 1930s and 1940s caused the largest increase in public debt. There was a sixteen fold increase in the gross public debt from $16 billion in 1930 to $260 billion in 1950. The public debt became $290 billion in 1960, $ 389 billion in 1970 and $ 712 billion in 1980. It rose from $712 billion in 1980 to $2,052 billion in 1988, a roughly three-fold increase during President Regan's Presidency. By 1992, it rose to about $ 4 trillion. It rose to about $5.6 trillion in 2000 at the end of the Clinton Presidency. The net Public Debt (excluding intergovernmental debt) in 2011 was $10.07 trillion or about 67 percent of GDP. Gross American Public Debt (including inter government debt) increased from $ 5,807 billions in 2001 to $ 10,025 billion in 2008 during the Bush presidency. It increased to $ 13,562 by the end of 2010 under Obama.

Future Projection of American Public Debt is a little scary. The Congressional Budget Office (CBO) in a report of June 2011 visualized two scenarios to predict how the public debt will change during the 2010-2035 time period. If the Bush tax cuts (extended by Obama) are allowed to expire as per current law in 2012, the net public debt will rise from 69 percent of GDP in 2011 to 84 percent of GDP by 2035. If Mitt Romney wins the presidential election and extends the Bush tax cuts and restricts the reach of the AMT, the public debt will rise from 69 percent of GDP in 2011 to 100 percent of GDP by 2021 and approach 190 percent of GDP by 2035. That could be disastrous for the United States.

As of January 2011, foreigners owned $4.45 trillion of American debt, or approximately 45 percent of the net public debt of about $ 13 trillion. The largest holders are the central banks of China, Japan, the United Kingdom and Brazil. The share held by foreign governments has grown over time, rising from 13 percent of the public debt in 1988 to 25 percent in 2007. As of May 2011 the largest single holder of U.S. government debt was China, with 36 percent of all foreign held U.S. Treasury securities. It was only 6 percent in 2000. This exposure has financial or political risks. The United States could have a problem in future borrowing if foreign central banks stop buying Treasury securities or start selling them heavily.

Debt has to be repaid with interest. Budgeted net interest on the public debt was approximately $240 billion in fiscal years 2007 and 2008. This represented approximately 9.5 percent of government spending. Interest was the fourth largest single budgeted disbursement category, after defense, Social Security, and Medicare. Despite higher debt levels, this declined to $189 billion in 2009 or approximately 5 percent of spending, due to lower interest rates. Average interest rates declined due to the financial crisis from 1.6 percent in 2008 to 0.3 percent in 2009. Nearly 50 percent of the interest payments are now leaving the U.S. CBO estimates that nearly half of the debt increases over the period 2009–2019 will be to finance interest payments.

The Republican Administrations are profligate spenders on defense and corporate subsidies. They also have been cutting taxes of the high income groups. President Bush inherited a surplus budget and quickly proceeded to liquidate it through tax cuts for the rich and American corporations, and defense expenditure on the Iraq war, the war on terror and homeland security. By the end of his first term, the Administration was short of money and uncontrolled printing of dollars commenced in 2004. The annual US budget deficits during the Bush Presidency rose from 32 billion dollars in 2001 to 451 billion dollars in 2008. The government debt increased during the same period by $ 3.259 trillion.

State Government Budget and Debt

If the financial position of the Federal Government is bad, that of the State Governments in the U.S. is even worse. President Obama has been complaining that whatever jobs are created in the private sector through government incentives and initiatives are being offset by losses of jobs in the public sector due to austerity measures at State levels. All the states are struggling to balance their budgets as their incomes have come down following the Sub-Prime Mortgage Crisis of 2007-2008. Let us take a look at the budget deficit in the State of California, the richest state in the United States and the eighth largest economy in the world.

In 2008 and 2009, California repeatedly approached insolvency. It was at times unable to meet some of its basic financial obligations in a timely way. The state had budget deficits of about $ 4 billion in 2008-09, $ 5.2 billion in 2009-10 and $ 19.6 billion in 2010-11.

A state's General Fund revenues come from a variety of taxes, fees, licenses, interest earnings, loans, and transfers. Almost 95 percent of the total, however, derives from the state's "big three" taxes, the personal income tax, the sales and use tax, and the corporate income and franchise tax (CT). _Sales and Use Tax_ is levied on purchases of tangible personal property. About two thirds of income comes from retail spending by consumers, including light vehicles and trucks. The remaining one third come from the purchase of building materials involved in new building construction and business to business transactions, where a business is the item's final consumer. The weakness in housing and vehicle sales since 2009 has played a major role in decline in taxable sales for the year. High unemployment and a relatively high savings rate are reducing overall consumption. There is a problem of collecting Sales and Use Tax from sellers in other states on purchases through internet. This is reported to be causing a loss of revenue to the tune of a billion dollars.

California used nearly 8 percent of its general fund budget to pay off debt this in 2011. That is more than twice the share eight years ago. The combination of higher bond payments and declining tax revenues has driven the debt burden to 7.8 percent of the general fund budget.

In 2008–09, revenue increases from policy changes reduced what would have been a major reduction in Corporate Tax revenues. These changes increased Corporate Tax collections by $1.8 billion in 2008–09 and $700 million in 2009–10. However, these measures expired at the end of 2010 and Corporate Tax revenues were expected to fall by about $1.2 billion a year.

General Fund revenues are falling due to the economic slowdown. Options for raising revenue need to be examined. Some options are:

Increase tax rates. This is resisted by the Republican Party.

_Some of the temporary tax increases, like the millionaire tax, vehicle license fee that are set to expire by the end of 2010–11 have to be extended._ _Two tax increases were enacted in 2009, a 0.25 percentage point increase in each marginal tax rate and a reduction in the dependent credit. Both are in effect for the 2009 and 2010 tax years only. These tax increases generated $2.9 billion in 2009 and $2.2 billion 2010._

Seek new Federal assistance. The 2009–10 budget deficit was reduced in a large part due to the availability of billions of dollars in federal relief. However, the Federal Government is also having difficulties in balancing its budget. It will be difficult for California policymakers to convince Congress and the President to extend new budgetary relief to the states.

Options for reducing expenditure or austerity measures are deeply unpopular with the people. Some measures which are being adopted include reducing staffing in government departments like police, postal services etc.; reducing salaries, perks and retirement benefits of pensioners; reducing expenditure on development and maintenance of infrastructure; reducing allocations for early childhood development, for after school programs and for mental health programs.

California's legislature passed a plan to reduce the budget deficit for 2011 to about $15 billion. The expenditure reduction included $1.7 billion in cuts to higher education and $1.6 billion in cuts to health care for low-income Californians. This included a 10 percent cut in reimbursements to Medi-Cal, mandatory co-payments and a soft cap on doctor visits. Public schools in California are already spending less per student than those in 28 states. The $1.7 billion cut will wipe out high-school sports and student busing, and reduce the academic calendar by seven days. A shortfall of $1 billion will slash hundreds of millions of dollars from universities and care of the elderly and disabled. Finally, the plan decreases the state's reserve fund to $500 million from the $1 billion the governor earlier hoped for. California spent $9,657 per student on educating them from kindergarten to 12th grade in 2008-09, as per a U.S. Census Bureau report. The national average for that year was $10,499. The State's high-school dropout rate of 5 percent exceeded the national average of 4.1 percent in 2007-2008, according to the U.S. Education Department.

The governor failed to come to agreement with Republicans on a plan that included extending some expiring tax increases to raise about $11.2 billion. Democrats remained hamstrung, however, by a requirement that any measure to raise taxes must still gain the support of two-thirds of lawmakers.

Municipal Budgets and Debt

The main sources of income of counties or municipalities in the U.S. are property tax, income tax and local taxes. Before the Sub-Prime meltdown, property tax used to account for about 23 percent, income tax about 17 percent and other taxes about 7 percent. Service charges and misc. income accounted for another 17 percent. Balance 34 percent used to come from Federal and State grants. Ever since the economic crisis of 2008, there has been a substantial fall in the income from property tax, income tax and service charges. With state and Federal budgets in disarray, the possibility of getting more grants is non existent. Republicans are always against increasing taxes for the rich and the corporations. The finances of most counties and municipalities are in dire sates. They are forced to adopt austerity measures such as reducing salaries and pension benefits and reducing staff in various departments.

The Californian city of San Bernardino, a city of about 210,000, filed for bankruptcy protection in August, 2012. It has a $46million budget deficit. The city listed assets and debts of over $1bn. The city has already reduced its workforce by 20 percent over the last four years. San Bernardino, located 60 miles (96km) east of Los Angeles, was affected by a foreclosure crisis spawned by the housing crash. An estimated 5,000 homes have been repossessed. San Bernardino is struggling with an unemployment rate close to 16 percent, almost double the national average. It becomes the third city in the state to go bust in just over one month.

Stockton, a city of nearly 300,000 in California's Central Valley, filed for bankruptcy in June, 2012 with a $26m budget gap. It became the largest US city to go bust since Cleveland, Ohio did so in 1979. Stockton was followed by Mammoth Lakes, the ski resort town of about 8,000 in the Sierra Nevada Mountains in July, 2012. The city was saddled with a $ 43 million legal judgment for a botched development agreement more than twice its budget. Mammoth Lakes also faces a deficit in its general fund of up to $2.5m. There is little hope that the situation is going to improve unless income taxes for the rich can be raised substantially. That is unlikely to happen. Hence public services like police, fire services, postal services and garbage disposal will continue to deteriorate.

Europe

The situation in the European Union is similar to that of the U.S. The European Union had a GDP of over US$17.578 trillion in 2011 which made it the largest economy in the world. Its GDP is growing at a rate of about 1.5 percent which is similar to the U.S. As per IMF World Economic Outlook, its public debt touched 82.5 percent in 2011. The overall unemployment rate at the end of 2011 was 10.3 percent.

The countries of the European Union except U.K. are similar to the states of the U.S. as economic entities. Britain has a separate currency while the other members use the Euro. The member countries of E.U. cannot print money to meet their needs. Five of its 29 member countries, Germany, France, U.K., Italy and Spain account for close to 70 percent of the GDP. Public Debts of these countries in 2011 were 81.2, 85.8, 85.7, 120.1 and 68.5 percent of GDP respectively. The governments of Greece (public debt 165.3 percent), Italy (120 percent) Portugal 107.8 percent and Ireland (108.2 percent) are in serious economic difficulty. Banking industry in Spain is in serious difficulties and had to be bailed out. The economies of U.K., Italy, Spain, Greece, Portugal, and Ireland are in recession. The unemployment rates in Spain 24.6 percent, Greece 21.9 percent, Portugal 15.2 percent and Ireland 14.6 percent are well above the average of the European Union.

The twelve new member states of the European Union, (former members of the Soviet Union) have enjoyed a higher average percentage growth rate than the original members of the EU. Reasons for this better growth include government's commitments to stable monetary policy, export-oriented trade policies, low flat tax rates and the utilization of relatively cheap labour.

Central Government Finances

The finances of the U.K. government are in doldrums. The public debt of U.K. was 37 percent of GDP in 2007. By the end of 2011 it had risen to £1.28 trillion or 85 percent of its GDP. The annual cost of servicing the public debt amounts to around £ 43 billion, or roughly 3 percent of GDP. Due to the Government's significant budget deficit, which must be financed by borrowing, the national debt is increasing by approximately £121 billion per annum or around £2.3 billion each week. The public debt has risen dramatically since 2008, when the British economy slowed sharply and fell into recession. The rise has been mainly caused by increased spending on welfare benefits, bank bailouts, and a significant drop in receipts from stamp duty and income tax.

Germany had a current account surplus of about $ 149 billion in 2010. But the German Government also has a budget deficit and a public debt which is equivalent to 81 percent of GDP.

The French Government finances are also weak. Public debt of France in 2007 was about 60 percent of GDP. By 2009, it had risen to 69 percent to $ 2.1 trillion. By 2011 it has risen to 85 percent and is expected to rise to 96 percent by 2012. Here also, the rise has been mainly caused by increased spending on welfare benefits, bank bailouts, and a significant drop in receipts from income tax. The annual budget deficit is about $ 200 billion.

It will thus be seen that central government finances of the three largest economies are in trouble. Italy, Greece, Portugal and Ireland have public debts over 100 percent of GDP. Greece and Ireland have received bailouts. Italy and Spain may need bailouts to avoid sovereign defaults.

Causes of Impoverishment

It will be clear from the details given above that the finances of governments in the developed countries, whether at the central government, state government or county/ municipal levels, are going from bad to worse. Economic downturn resulting in reduced incomes is being blamed for the situation. But the economic downturn is not going to change. What additional revenues can be generated by economic growths of 1 to 2 percent, which is the most optimistic projection for most of the developed countries? Many European countries are likely to have negative growth in foreseeable future.

Inadequate Revenue Generation

The primary reason for the declining wealth of the developed nations is that the tax revenues are falling. Part of the reason is the economic down turn. But most countries have lowered income taxes on the rich and the corporations and given various kinds of tax breaks.

The net capital account balance is negative for the U.S. and the European Union. Both export more than they import. It is also seen that the investors of the U.S. and the E.U. invest more in the developing world than what the investors outside the U.S. and E.U. invest in these countries. U.S. and the E.U. also pay billions of dollars in interest payments on debt held by other countries. There is thus a constant flow of wealth from the U.S. and the E.U. to other countries, particularly the developing countries. Though the out flows may appear to be small compared to the total wealth of these countries, the outflows are real and are bound to hurt the economies of the countries in the long run.

Import duties are another source of revenue generation which the U.S. and E.U. have not exploited adequately. The U.S. imports goods worth about $ 2 trillion. A 10 percent increase in import duties could generate revenue of $ 200 billion for the U.S. government. A 30 percent increase could halve the current deficit. Increased import duties would have the additional benefit of making imports costlier and make domestic products more competitive. That would help revive domestic manufacturing and boost employment.

Too much reliance on Borrowing

The U.S. and most countries in the E.U. have borrowed more than 85 percent of their GDP. Some countries in the E.U. have sovereign debts more 100 percent of their GDP. And their debts are growing by leaps and bounds. Payment of interest on debt is the second largest government expenditure after social security. If this reliance on debt is not reduced, sovereign defaults will become the rule rather than exception. Complete financial chaos will engulf the whole world.

Tax Cuts

The sorry state of government finances are simply because the governments are not taxing the rich and the corporations to the extent they need to balance their budgets. This has been particularly so ever since President Regan took over in the U.S. and Margaret Thatcher became Prime Minister of U.K. President Bill Clinton's eight years as the president of U.S. has proved that with sensible taxation policies, it is possible for countries to produce surplus budgets and reduce debt. President Bush negated the gains of President Clinton and set the U.S. on the road to bankruptcy with his tax cuts.

Tax Evasion

Another reason for inadequate revenue generation is the benign approach to tax evasion and flow of capital to tax havens. The U.S. and N.A.T.O. spend billions of dollars fighting terrorism. All countries except the tax havens would be immensely benefited if U.S. and E.U. launch a war on tax evasion and financial terrorism and destroy the tax haves for ever.

As per a 2012 report submitted by Tax Justice Network, the global rich hold $ 32 trillion in offshore tax havens such as Switzerland and Cayman Islands. All the world's top 10 private banks like UBS, Credit Suisse, Goldman Sachs, Citibank, etc have wealth management services run by highly paid professionals to enable the world's super rich to hide their wealth from their wives and taxmen. This capital flight is not only from developing nations but also from developed nations. U.S. Presidential candidate Mitt Romney is alleged to have millions stashed abroad in Switzerland to avoid taxes. No wonder, the powerful developed nations do little to destroy these tax havens. It is worth mentioning that if tax could be levied at 30 percent rate on this money, about $ 10 trillion could be realized and public debt of many nations could be considerably reduced if not eliminated.

Involvement in Wars

The U.S. and to a lesser extent, the E.U. have needlessly got involved in wars in Iraq and Afghanistan. These wars have cost more than $ 3 trillion and counting. Excessive warfare and high defense budgets have been the cause of economic and military decline of many ancient empires. It is a major reason for the economic decline of The U.S. and E.U.

Conclusion

The impoverishing of the developed world is likely to weaken the effectiveness of the governments in dealing with domestic problems like unemployment, poverty and hunger. It will also weaken their ability to dominate world affairs.

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Chapter 5: Impoverishing of the People

Increasing Inequality

A study by the World Institute for Development Economics Research at United Nations University reports that the richest 1 percent of adults of the world owned 40 percent of global assets in the year 2000. The combined wealth of the "10 million dollar millionaires" grew to nearly $41 trillion in 2008.

A study entitled "Divided We Stand: Why Inequality Keeps Rising" by the Organization for Economic Co-operation and Development (OECD) reported that income inequality in OECD (developed) countries is at its highest level for the past half century. The average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent across the OECD, up from seven times 25 years ago. In the United States inequality has increased further to 14 times from already high levels. Traditionally more egalitarian countries, such as Germany, Denmark and Sweden, have seen the gap between rich and poor expand from 5 to 1 in the 1980s, to 6 to 1 today."

Increasing Unemployment

Unemployment is the fundamental problem of the US economy. Unemployment benefits were intended to help people over the down time in the cycle when workers were laid off. Today the unemployment is becoming permanent as entire occupations and industries are wiped out by outsourcing manufacturing and business processes to developing countries such as China, India and Philippines. Unemployment also increases as corporations replace their American employees with foreign ones. Unemployment hurts the US economy in three ways. Firstly, the unemployed will spend less. This reduced spending will have a ripple effect leading to more job losses and further reduction in spending. Some say that the permanent decline of US jobs started in 1986 with the onset of cheap imports from China. Secondly, more the unemployed, larger is the government spending on social security. Thirdly, more the unemployed, the less is the income tax collection. American companies may choose to ignore the human tragedy they orchestrate whenever they cut jobs or ship them off shore or employ non American immigrants to increase profits.

The average unemployment in the E.U. is 10.3 percent which is higher than in the U.S. Unemployment in the United Kingdom has been hovering around 8.2 percent. That is about the same as in the U.S. About 2.67 million people are unemployed with a further 1.3 million "partially unemployed" (people in part-time work but unable to find full-time work). The unemployment rate among 18 to 24 year olds has risen from 11.9 percent to 17.3 percent. France and Italy have an unemployment rate of 10.1 percent. Spain has an unemployment rate of 24.8 percent while in Greece it is about 22 percent. In Portugal and Ireland it is about 15 percent. With public debts increasing, austerity measures are the order of the day. And austerity means job cuts in the public sector. The private sector has been slashing jobs or shipping them to the developing countries.

Increasing Debt

As incomes drop, personal debt increases. Total credit card debt in the U.S. has increased by over 50 percent since 2000. The average American credit card debt is $16,635. The personal savings rate has hovered close to zero for the past several years.

Increasing Poverty

Poverty in the U.S

Poverty is a reality in America, just as it is for millions of other human beings on the planet. According to the US Census Bureau, 35.9 million people out of the population of 300 million lived below the poverty line in the United States in 2007. The number increased to 39.8 million in 2008 (13.2 percent) and to 43.6 million (14.3 percent) in 2009. Between 2008 and 2009, the poverty rate increased for children under the age of 18 from 19.0 percent to 20.7 percent. Thus, one in five children in the United States lives in poverty. Almost half of these children (9.3 percent) live in extreme poverty. 19 million Americans (6.3 percent) live in extreme poverty. This means their family's cash income is less than half of the poverty line, or less than about $11,000 a year for a family of four. The percentage of people without health insurance increased to 16.7 percent in 2009 from 15.4 percent in 2008. The number of uninsured people increased to 50.7 million in 2009 from 46.3 million in 2008. In 2010, the number of American homes with TV fell from 98.9% to 96.7%, the first time that the number has dropped in 20 years. (Briefings, Time Magazine May 20, 2011). Crime is becoming a way of earning a living. Unemployed men are not willing to marry. This in turn leads to single parent families. People living in poverty can develop patterns of behavior such as alcoholism which is harmful to society. The United States is ranked 21st on the World Human Poverty list. Single parent households make up 60 percent of the poor families. The US spends less than 1 per cent of GDP on poverty alleviation.

The poorest community in the US is the Pine Ridge Indian Reservation. It has 85 percent unemployment, 97 percent poverty, life expectancy 50 years, teenage suicide 4 times the national average, and infant mortality 5 times the national average. Many families don't have electricity, tap water or sewer. The US has 3.5 million homeless and 1.3 million are homeless children, with 4 percent under the age of 5. Half of all homeless women and children are fleeing domestic violence. Families make up 33 per cent of the homeless population. Veterans account for one third of the homeless in America. 45 percent of homeless population is single males, and of those 40 per cent are veterans. 15 to 22 percent of the homeless are employed.

Poverty in the EU

In spite of the overall wealth of the European Union (EU), poverty in the EU is still at a relatively high level. **Almost 80 million people, of whom 19 million are children, live below the poverty line in the EU.** Nearly 1 in 7 people or about 16.4 percent of the population are at risk of poverty. The figures are even higher for some groups such as children and older people.

The poverty line in the UK is defined as being 60 percent of the median household income. In 2007–2008, 13.5 million people, or 22 percent of the population, lived below this line. This is higher than all but four other EU members. In the same year, 4.0 million children, 31 percent of the total, lived in households below the poverty line.

Poverty in France was only 6.1 percent in 2001. But things have worsened since. Poverty has worsened to about 16 percent or 11.2 million people. Extreme poverty" is growing, especially amongst vulnerable single-parent families (almost 30 percent of which are poor), young people (22.5 percent) and elderly women (15 percent).

Spain has the highest poverty rate among the European countries. 'Exclusion and Social Development 2012' report published by "Caritas" Spain states that 22 percent of Spanish households are living under the poverty line with a further 30% facing serious difficulties in making ends meet at the end of the month. 580.000 Spaniards, nearly 3.3 percent of the population are not receiving any income whatsoever. There are around 30.000 homeless people across the country.

Italy has the highest percentage of child poverty in all EU countries. Close to 2 million kids live in poverty in Europe's third-largest economy, according to a new UNICEF report.

Unfortunately, social security programs, food security programs and other unemployment benefits do not remove poverty. They alleviate poverty. Only creations of jobs and self employment which generate incomes can push households over the poverty threshold of the country can remove poverty.

Increasing Hunger

Hunger in the U.S.

There has been a dramatic increase in hunger in the United States in recent years. 6.7 million US households had to skip a meal or meals because there wasn't enough money to buy food at some time during 2008. The number represented a 39 percent increase from 2007. This was the largest increase ever recorded since nationally representative food security surveys were initiated in 1995, as well as the largest year-to-year percentage increase. 10.4 million US households had to eat less varied diets, participate in Federal food assistance programs, or get emergency food from community food pantries in 2008, a 27 percent increase from 2007.

The United States has a number of food and nutrition assistance programs. In addition there is a significant private effort to feed hungry people through food banks and allied agencies. The Food Stamp Program helps roughly 40 million low-income Americans to afford a nutritionally adequate diet. The Special Supplemental Nutrition Program for Women, Infants and Children (WIC) provides nutritious foods, nutrition education, and referrals to health and other social services to low-income pregnant and breastfeeding women, and infants and children up to age 5 who are at nutrition risk. The participants receive checks or vouchers to purchase nutritious foods each month. About 8.7 million Americans received WIC benefits each month in 2008. Approximately 4.3 million of them were children, 2.2 million were infants, and 2.2 million were women. The National School Lunch Program is a federally assisted meal program that provides nutritionally balanced, low-cost or free lunches to children from low income families. It benefited 30.5 million children in 2008.

Food banks established in local communities obtain food from growers, manufacturers, distributors and retailers who in the normal course of business have excess food that they cannot sell. Other sources of food include the general public in the form of food drives and government programs that buy and distribute excess farm products, mostly to help support higher commodity prices. Food banks then distribute food to a large number of non-profit community or government agencies, including food pantries, soup kitchens and homeless shelters. America's Second Harvest, the nation's largest network of food banks, reports that 23.3 million people turned to the agencies they serve in 2001, a increase of over 2 million since 1997. Forty percent were from working families. 33 million Americans continue to live in households that did not have an adequate supply of food. Nearly one-third of these households contain adults or children who went hungry at some point in 2000.

Hunger in the EU

EU is more concerned about hunger in the world than in its own back yard and provides aid to other countries to reduce their hunger. It is perhaps embarrassing for the world's richest nations that there are hungry children and adults in their own midst. So the governments of Europe try to ignore it. But hunger is real in the EU.

The Trussel Trust charity in UK runs a number of food banks and has provided emergency food aid to over 20,000 children. With 3.1 million children living in poverty, hunger is an ignored reality in UK. Every day UK food banks meet desperate parents who are skipping meals to feed their children and find themselves forced to consider stealing to stop their children going to bed hungry.

As per Independent Catholic News, one million people are going hungry in Spain in 2012. Hundreds of thousands of children in Spain eat only at school. During the rest of the day they have nothing. The situation in Spain is getting worse because of the international economic crisis. According to Caritas, there has been an increase over the last six years of people attending the 'social canteens', and the numbers continue to rise. Caritas alone has responded to 6.5 million requests for help. This is a rise of 5 percent on 2010.

A report, entitled "The condition of youth in Greece, 2012" prepared by the University of Athens says that 439,000 children in the country are currently living below the poverty line and are underfed. Some children have fainted from hunger in classrooms. The Ministry of Public Education, which initially dismissed the claims as "propaganda", was forced to recognize the seriousness of the problem and subsequently decided to hand out to pupils from the poorest families meal vouchers with which to buy breakfast from the school canteen.

Causes for Impoverishment

Neo-liberal Policies

The primary cause of the impoverishment of the people is the neo-liberal economic policies adopted by President Regan in the U.S. and Premier Margaret Thatcher in Britain in the 80's. France started an era of "corporatization" in 1983. And slowly, the system was adopted by most the developed economies of the globe.

The Regan Administration introduced the largest tax cuts in American history and reduced the role of the government. The economic policies enacted by him in 1981, known as "Reganomics" were influenced by "supply side" economics and advocates of free markets. The policies aimed to reduce the growth of government spending and increase economic growth through tax cuts (under Reagan, the top personal tax bracket dropped from 70 percent to 28 percent in 7 years). The Regan Administration continued vigorously with deregulation on corporate activity started by Carter in 1980. What Regan started, the world followed.

Reduction in income tax reduced government incomes and there was less money available for providing social security, health care and poverty alleviation programs.

Reduction in government spending and privatization of public sector services led to job losses and created private sector monopolies in vital sectors like energy and public transport.

Free market policies and deregulation weakened the unions and left the working class at the mercy of the corporations. Working hours increased, pay, perks and retirement benefits decreased. Working environments and safety requirements were degraded.

Deregulation led to excessive speculation by banks and financial institutions which culminated in the world wide financial meltdown and economic crisis of 2008, which has contributed substantially to the increasing misery of the working classes of the U.S. and EU.

Unemployment

American and European corporations have been shipping jobs overseas to developing countries to maximize profits since the 1980s. A major effect of this on the American and European economy is increasing unemployment, particularly in manufacturing industry, IT and banking. The US economy is more than 8 million jobs short of keeping up with population growth. In the five years from 2002 to 2007, U.S. manufacturing lost 2.9 million jobs, almost 17 percent of the manufacturing work force. The losses were across the board. Not a single manufacturing payroll classification created a single new job.

The banking and financial jobs are the latest on the firing line. Even the services sectors like aviation and hospitality sectors are loosing jobs. In five years the US economy created only 70,000 jobs in architecture and engineering, many of which are clerical. Engineering enrollments in US universities are shrinking. There are no jobs for graduates. There are several hundred thousand American engineers who are unemployed and have been for years. Engineering graduates cannot get even a Wal-Mart jobs because their education makes them over-qualified. In 2007 there were over 200,000 fewer managerial and supervisory jobs than 5 years ago. The total number of private sector jobs created over the five year period is 500,000 jobs less than one year's legal and illegal immigration. (In a December 2005 Center for Immigration Studies report based on the Census Bureau's March 2005 Current Population Survey, Steven Camarota writes that 7.9 million new immigrants entered America between January 2000 and March 2005.) The percentages or numbers can be disputed but the trend cannot be disputed.

Unemployment is in the EU has also been increasing. The average is around 10.3 percent which is higher than the US. In some countries like Spain and Greece, the unemployment rate is over 20 percent. Youth unemployment is even higher. The greatest tragedy is that there are millions who have no income, no social security and no insurance. They have to depend on community kitchens for subsistence food aid.

Consumerism

The culture of consumerism has been the greatest enemy of the working class in the US and the EU. It started in the US in the 1920's when easy credit and buy now - pay later in installments schemes boosted sale and economic growth. Houses, cars, and other consumer items could be bought on installments payable over a few months to 30 years. The idea was soon adopted across the Atlantic. It also worked fine except during the "Great Depression" till the 1980s when job losses began to occur. When you do not have a job how do you pay your mortgage and installments. Today there are over 18 million unsold houses in the US and over one million in Spain. Other consumer goods are also piling up in the factories and warehouses.

Interest Rates

The saving bank interest rate in the US and EU and many of the developed countries is 0 or close to zero. This is designed to discourage saving and encourage consumerism. But if you have no savings, how do you cope when you loose your job.

Conclusion

The impoverishing of the bottom 60 percent is real in both Europe and the US. The condition of the bottom 20 percent is pathetic and comparable with poverty in the developing world. But it hurts more because unlike the poor in the developing world, they are not used to it. Unless there is a major change in the economic policies which can create employment and increase government expenditure or poverty alleviation programs, social unrest is inevitable. Men do not starve themselves to death. They take up violent crime to survive. Women are forced into prostitution. Some even fly to developing countries to ply there trade. Some families are relocating from Portugal to Madagascar.

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### Chapter 6: Bonanza for the Rich

Governments all around the world are of the rich, run by the rich, and run for the rich. The middle class are the tools for exploitation. The working class is the target for exploitation and the poor are necessary evils that are best eliminated or left to eke out a miserable existence in slum like conditions. Governments around the world always work to ensure that the rich have more opportunities to become richer.

Growth of Wealth of the Rich

Another name for the rich is a "high net worth individual". A high-net-worth individual (HNWI) is defined as a person having investable finance excluding the value of their primary residence in excess of US$1 million. Ultra High Net Worth Individuals (UHNWIs) are individuals or families who have at least US$30 million in investable assets, or with a disposable income of more than US$20 million. As per the "World Wealth Report" published by Merrill Lynch and Capgemini in 2012, there were about 7 million HNWIs in the world in 2000 with a total estimated wealth of $ 33.7 trillion (2012 USD). By 2011, the number of HNWIs had increased to 10.7 million and their total wealth had reached $ 43.2 trillion (2012 USD). It will be noticed that the number of HNWIs in the world have increased about 50 percent in the last 12 years. As the world's population is about 6.5 billion, the rich are about 1.5 percent of the world's population. The report also predicted that the total wealth with HNWIs will grow at a rate of 8 percent per year.

As per the World wealth Report 1012 from Capgemini and Royal Bank of Canada wealth management services, the population of high net worth individuals increased 0.8 percent to 11.0 million in 2011 while overall wealth declined by 1.7 percent to US $42.0 trillion. Since real wealth cannot decrease, a part of this wealth is virtual wealth, shares, derivatives, works of art and antiques etc whose value fluctuates as per market conditions. In 2008 world economic crisis the HNWI global wealth had declined by 19.5 percent. In 2011, Asia-Pacific topped North America to become the single largest home to HNWIs for the first time, while North American HNWIs still accounted for the largest regional share of investable wealth.

North America has 3.35 million HNWIs with a total wealth of $ 11.4 trillion. Europe has 3.2 million HNWIs with a total wealth of $ 10 trillion Asia Pacific has 3.7 million HNWI with a total wealth of $ 10.7 trillion. After a robust growth of 8.3 percent in 2010, the global population of high net worth individuals (HNWIs) grew marginally by 0.8 percent to 11.0 million in 2011. The UHNWIs declined in 2011 by 2.5 percent in 2011. The total wealth of UHNWIs declined by 4.9 percent during the same period.

Most global banks have a separate business for wealth management for UHNWI. Figures gathered by Rolls-Royce suggest there are 80,000 people around the world with disposable income of more than $20 million. They have, on average, eight cars and three or four homes. Three-quarters own a jet aircraft and most have a yacht.

Benefits for the Rich

The benefits for the rich vary from country to country. Outside tax havens, the U.S. at the moment provides the most benefits to its HNWIs and UHNWIs. Some of these are given below.

The News Week Magazine published a startling new report titled "Welfare for Millionaires" assembled by Sen. Tom Coburn, a Republican from Oklahoma. According to the report, billions in government dollars are given as benefits to America's wealthiest citizens. These included unemployment payments, subsidies and tax breaks on luxury items like vacation homes and yachts. Americans earning more than $1 million a year collect more than $30 billion in government largesse each year. The $30 billion in handouts is a lot of money when you consider that the budget deficit of the State of California is for 2011 is only $15.4 billion and just $ 1.4 billion could restore cuts in public school funding in California and save thousands of jobs.

As per the report, Jon Bon Jovi, the millionaire rock star, took federal dollars to raise honeybees on his property. Billionaire moguls David Rockefeller and Ted Turner have also accepted more than half a million dollars in farm payments. Basketball legend Scottie Pippen took $210,520 in agriculture subsidies while making his fortune playing for the Chicago Bulls. Tax records show that more than three fourths of high earners collecting farming money list their primary residence in a city and do no farming.

Tax Breaks

The 1 Percent or the super rich are the primary class enemies of the Bottom 60 Percent. They are always exploiting every loophole in law and every opportunity to increase their wealth by means foul or fair. Let us look at some examples. According to federal records more than 1,500 millionaires paid no income tax in 2010. This was mainly due to tax loopholes and savvy accountants. Tax breaks were taken by millionaires on things like mortgage interest ($27.7 billion), rental expenses ($64.2 billion) and electric vehicles ($12.5 million). These tax breaks add to the Federal Deficit. The latest IRS statistics show that the nation's top 400 income earners, billionaires and mega millionaires, who are supposed to be paying taxes on their top tax bracket income at a rate of 35 percent are actually paying taxes at an effective rate of only about 18 percent. No politician seems even remotely interested to plug the major loopholes.

Social Security

Top earners, surprisingly, also get significant amounts of unemployment insurance and disaster payments. Since 2004, people with seven-figure salaries have accepted more than $9 billion in Social Security

Benefits for the Corporations

Most governments give all kinds of benefits to corporation like cheap land, high rates for government purchases, concessions in power or tax rates etc. in search of kickbacks. But the U.S. takes the cake in this aspect.

American corporations and their global counterparts are not concerned about the American economy or the economy of any other countries. They have only one goal, make more profits. They are financially powerful and spend billions of dollars lobbying in support of globalization and decontrol of the economy. Lobbying involves spending money on researching, writing and convincing lawmakers to vote in the interest of Big Business. They run magazines like Fortune and Forbes Asia and commission authors to write books and articles in favor of neo liberal economic policies. The oil companies spent about 55 million dollars lobbying against legislations favoring fuel efficient cars and subsidies for development of alternate energies with members of the Senate and House of Representatives during the first six months of 2008. The major contributors were Exxon Mobil $8.1 m, Chevron $6.1 m, BP $5.2 m, and Concho Phillips $4.4. The industries spent more than $ 614 million on lobbying for favorable legislation and tax breaks during the same period. The drug industry spent $ 113million on lobbying in the first six months of 2008; the insurance industry spent $76 million; electric utilities industry spent $60 million; computer industry spent $60 million; oil and gas industry spent $55 million; education industry spent $51 million, air transport industry spent $50 million; healthcare, entertainment and manufacturing industry spent $ 48 million each. (Source: Center for Responsive Politics) With politicians and senior policy makers in the administration getting so much money from corporate America as election contributions and perks, it is unlikely that they will act to stop globalization, outsourcing and cheap imports from countries like China where US Corporations have invested heavily to increase profits unless they are forced to do so.

Farm subsidies are actually one of America's largest corporate welfare programs. Fortune 500 companies, such as John Hancock Life Insurance received $2.8 m in farm subsidies; International Paper received $1.28m; Westvaco received $500,000; and ChevronTexaco $447,000. Celebrity "hobby farmers" such as David Rockefeller, Ted Turner and Scottie Pippen received $553,782, $206,948, and $210,520 respectively. Riceland Foods Inc. $ 541 million, Producers Rice Mills Inc $ 308 million, Farmers Rice Co-op $ 145m, CHS Inc. 49m, Tyler Farms 37 m, Montana Department of Natural Resources and Conservation 35m, First National Bank, Sioux Falls 28 m. Ducks Unlimited Inc 28 m, Pilgrim's Pride Corporation 26 m, Missouri Delta Farms received more than $25 million in farm subsidy between 1995 and 2005. Members of Congress, who vote on farm subsidies, such as Republican Senators Charles Grassley and Senator Gordon Smith received $225,041 and $45,400, plus a 25 percent ownership in three firms that received $2,114,622 and Democratic Representative John Salazar received $161,084.

Tax Breaks & Exemptions

**As per the latest report of the Citizens for Tax Justice** America's top corporations are now getting what essentially amounts to a 50 percent discount off their tax bills. By current statute, corporations are supposed to face a basic 35 percent income tax on their corporate profits. According to the new Citizens for Tax Justice Report, top U.S. corporations have actually been paying only 18.5 percent of their profits to Uncle Sam over the last three years. Corporations, in effect, have achieved total tax loophole parity with America's individual super rich. 185 of the 280 corporations in Citizens for Tax Justice's new corporate tax report claimed tax exemption of about $ 12 billion on stock option deductions over the 2008-2010 periods. **The 280 profitable companies** made a combined profit of $1.4 trillion over 2008-2010. Under the tax code, they should have paid over $473 billion in federal corporate incomes taxes. They actually paid only $250.8 billion. The tax subsidy "discount" for 2010 alone was $85.1 billion. Full tax collection could substantially reduce the deficit in the federal budget and "avoid" massive cuts in public services and job losses.

Reduced Duties

Under globalization, all countries have been made to reduce import duties and are not allowed to increase them. Much of this is done under the garb of benefiting consumers by keeping prices low. But the real beneficiaries are large importers like Wal-Mart, Sony, Mitsubishi, and Nike who gets items manufactured in the developing world and sells them in the developed world. This enables corporations to make huge profits but is the primary reason for job losses and economic decline of the developed world.

Overseas Investment Incentives

European countries had been encouraging their corporations to invest abroad since the seventeenth century when the East India Company was formed by Britain and other European nations followed suit. Many European multinational companies like Siemens, Proctor and Gamble, Phillips, Burma-Shell were established during the colonial era and have survived.

The US Government set up the Overseas Private Investment Corporation (OPIC) in 1971. It is a government corporation designed to extend political risk insurance, loan guarantees and direct loans at subsidized rates to U.S. companies that invest abroad. It is worth noting that the US Government does not extend the same benefits to US companies investing in the US. Naturally, US companies prefer to invest abroad instead of investing in the US. According to Nobel laureate Milton Friedman, OPIC fails to justify its own existence. He says "I cannot see any redeeming aspect in the existence of OPIC. It is a special interest legislation of the worst kind, legislation that makes the problem it is intended to deal with worse rather than better.... OPIC has no business existing. Congress should close down this government corporation to prevent it from continuing to hurt the US economy. OPIC activity does not lead to any net increase in U.S. employment. OPIC subsidies merely shift employment from certain sectors of the economy to subsidized businesses in foreign countries. In fact, subsidies to businesses provided by OPIC distort the market-driven distribution of capital and labor resources. Therefore, OPIC subsidies are most likely to have a detrimental effect on overall national income of the US."

Due to increased profitability of companies shifted to developing countries and incentives like OPIC for investments abroad, domestic investment, particularly in manufacturing and small business has been dwindling in the developed world. Dwindling investment means dwindling jobs, dwindling jobs means less personal consumption, less consumption means economic down turn and the cycle continues. Not a single nuclear plant for producing electricity has been set up in the US since 1971. Many of US highways and bridges are crumbling due to lack of investment. The US government has to step in with investments and revive the American public sector.

Tolerance of Tax Evasion and Money laundering

The government finances of the developed countries have been in doldrums ever since the global financial meltdown of 2007-08. This has suddenly changed the attitude of the governments to tax havens and tax cheats from benign tolerance to serious concern. It was earlier assumed that despots, dictators and corrupt politicians and businessmen of the third world parked their undeclared wealth with Swiss banks and other tax havens. This was welcome as the funds were invested in the developed world and helped their economies to grow. In June 2007, an employee of the Swiss bank UBS flew to Washington and handed over documents that revealed that the bank had been assisting thousands of American taxpayers to illegally hide billions of dollars of income. The event has prompted the United States and European governments to expand their hunt for tax cheats. The off shore wealth management business is widespread. The money handled by major tax havens in 2009 were Caribbean Islands and Panama $ 900 billions, UK, Channel Islands and Dublin $ 1.9 trillion, Luxemburg $ 800 billion, Switzerland $ 2 trillion, Hong Kong and Singapore $ 700 billion. The US and Germany are cracking down on tax evaders and foreign banks that assist them. Under a new US law, all foreign banks have to inform the Inland Revenue Service (IRS) about all American tax payers who have undeclared accounts in their banks by 2013. It is surprising that the developed nations who have the financial and military clout to take on armies of Iraq and Libya cannot quickly windup these tax havens and banks which provide "wealth management" sic tax evasion services which are hurting their war on government deficits. As per one estimate, Greece looses $ 20 billion in taxes per year due to tax evasion. Effective tax compliance will go a long way in improving the debt situation of governments of the developed and the developing world.

Bailouts

Banks and financial institutions made horrendous losses on speculative trading during the Sub Prime Crisis with the tax payer's money. The "Bailout Package" had been rejected once by the House of Representatives. But the influence of big money and lobbying prevailed. President Bush spent billions of dollars of tax payer's money to bailout banks before coming out with a $ 700 billion plan to bail out failing banks. European banks have been bailed out and the total taxpayer's money used for the bailouts around the world is in excess of $ 1.5 trillion. Spanish banks have been bailed out with over $ 150 billion in 2012 and more such payments are planned.

Conclusion

The rich and the multinational corporations have a strangle hold on the governments of the developed world and their economic policies. They have been ruling the developed countries and most of the world by proxy. Once in a while a leader like Indira Gandhi of India, President Allende of Chile or Hugo Chavez of Venezuela upset their apple cart. But with the help of the American Government and CIA, they are able to bounce back. Unless more such leaders appear on the scene, the ordinary people of the developed world have many painful years of poverty and hunger to face.

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Chapter 7: Causes of Decline

The United States emerged from World War II as the strongest economy in the world. The U.S. had remained untouched by the ravages of World War I and II and had built a thriving manufacturing industry and grown wealthy by selling weapons and lending money to the other countries fighting the wars. In fact, U.S. industrial production in 1945 was more than double the annual production between the prewar years of 1935 and 1939. In contrast, Europe and East Asia were militarily and economically shattered. The U.S. held a majority of world's investment capital, manufacturing production and exports. In 1945, the U.S. produced half the world's coal, two-thirds of the oil and more than half of the world's electricity. The U.S. held 80 percent of the world's gold reserves. It not only had a powerful army but also the atomic bomb. The US started the post War world with an initial advantage, consolidated it and assumed leadership of the capitalist world.

As the world's greatest industrial power and one of the few nations un-ravaged by the war, the U.S. stood to gain more than any other country from the opening of the entire world to unfettered trade. The United States was not only able, it was also willing, to assume this leadership role. Although the U.S. had more gold, more manufacturing capacity and more military power than the rest of the world put together, US capitalism could not survive without markets for their manufactured and agricultural products. The US got what it wanted through the "Benton Wood" systems for the world economy. After World War II, the US dollar replaced the British Pound as the primary trading currency for world trade. After the weakening dollar forced US President Richard Nixon to abandon the Gold Standard, the US dollar became the No 1 currency of the world. Today, only the US dollar, Euro and the British Pound are universally accepted for world trade. The US dominated the world economy during the latter part of the 20th Century. The strong dollar enabled the US to maintain this dominating position. But things have changed.

Inability to Reconcile to Realities in a Changing World

The governments, politicians, economists and intellectual of the world seem to be unable to understand the realities in a changing world. The U.S. is still the biggest military power and economy in the world. The investor of Europe and the U.S. hold most of the investable capital in the world. But manufacturing and business processes in the developed are no longer competitive when compared with the developing world. Developed countries have increasing budget deficits, trade deficits, unemployment, poverty, and hunger while all these are reducing in the developing world. China holds over $ 2 trillion of foreign exchange reserve and is called by some as America's bank. The reality is not going to change unless the governments of the developed world and their economic advisors are ready to change their policies.

Use of GDP as a Planning Tool

Per Capita GDP does not reflect the prosperity of the people of a country. It should not be treated as an index for any kind of economic planning. Any poverty alleviation program that is based on per capita GDP will only benefit big business and not the people whose poverty needs to be alleviated.

GDP growth rate should never be a factor in economic planning. Poverty alleviation, income growth of individuals, employment generation, infrastructure development, environment protection, conservation of natural resources, balanced trade, inclusive and sustainable growth should be objective of economic planning at all levels in any country.

Use of GDP for Measuring State of Economy

GDP is widely used by economists to gauge the health of an economy, as its indicators are relatively easily identified. The governments of almost all countries of the world use growth rate of GDP for economic planning and assessing the state of the economy. GDP has grave limitations when comparing economies of different countries. For example, the poverty threshold in the US is $ 17500 for family of four or about $12 per head per day while for the developing countries poverty threshold is $2 per day. GDP does not take into account equal value for equal work. For example when a barber gives a haircut in the US, GDP increase by $ 10 but when a barber gives a haircut in India, the GDP increases by about 50 cents. GDP does not take into account free services like domestic work, open source soft wares and internet services like Yahoo, Linux, Google and a host of other activities.

Use of GDP growth rate for economic planning leads to many distortions. Consumption accounts for about 70 percent of GDP in the U.S. So government policies are always encouraging or some times forcing people to spend. Let us see some examples:

The savings bank interest in many countries is zero or close to zero. People have no incentive for saving. Pensioners are unable to invest their retirement benefits in safe bank fixed deposits and get reasonable returns. In India, senior citizen can get as mush as 9.5 to 10 percent interest on bank fixed deposits. They do not have to invest in mutual funds or pension funds which are subject to market risks. Stock market melt downs, as we all know, occur every few years. High interests will not only encourage the economically disadvantaged to save for the proverbial rainy day but discourage speculation with borrowed money. It will increase social security in the developed world.

Whenever there is an economic slowdown, governments tend to release stimulus packages. In other words it increases liquidity and encourages banks to lend indiscriminately. This encourages people to borrow and invest in real estate or the stock market. The construction industry crates jobs and statistical growth is achieved. The rises in the share market gives a good feeling. Property prices and share prices keep rising till something happens. There is turmoil in the Middle East and oil prices shoot up or there is a change in government policy and liquidity dries up. As property and share prices crash, people are unable to pay their mortgages and bank loans. There is a financial crisis. Banks go bankrupt and need bailouts. Jobs are lost. The economically vulnerable are ruined. It happened during the Carter presidency, the Regan presidency and the Bush presidency.

Loss of Businesses Competitiveness

The strength of the U.S. Dollar, Euro and Pound is the real cause of loss of business competitiveness of the developed world. The minimum wage for an unskilled person in the US is $ 7.2 per hr or about $ 57 per day. This would translate to about Rupees 3000 per day in India. U.K. has different minimum wages for adults (over 21), 18-20 years and 16-17 years. The rate for an adult is ₤ 6.19 which will translate about Rupees 4500 per day. For that kind of sum one can hire a post graduate engineer or financial analyst with 10 years experience in India. The minimum wage in India is around Rupees 220 per day or less than four dollars per day. The labor rates in China, Vietnam, Bangladesh and many other developing countries could be even lesser. How can American or European manufacturers compete with manufacturing in the developing world? In search of profits, corporate America and Europe have outsourced much op their business operations to the developing countries resulting in job cuts in the US and job gains in the developing world. Medical tourism is a new reality. Persons with medical and dental problems are heading to India and other developing countries to get effective treatment for their problems and enjoy a holiday for less than what it would cost them to get treated in their own countries. If this is allowed to continue, all well paid jobs which can be shipped abroad will be shipped abroad. America and Europe will become nations of the unemployed and the under employed.

Strong currencies benefit the western governments. They have to spend less in giving aid to the developing countries. Strong currencies benefit western investors and corporations. They have to spend less to buy foreign assets including companies. They have to spend less to get things manufactured in developing countries and selling them at home and make large profits. Strong currencies are the primary reason why manufacturing and even high end services like IT, healthcare, financial analysis and call centers are being shifted to the developing countries leaving millions at home unemployed or under employed.

Neo-liberal Economic Policies

Deregulation of Banking

**"** **The US banking system is sound...",** President Herbert Hoover had said in 1930, during a Presidential campaign against Roosevelt after the stock market crash of 1929 and collapse of a large number of smaller banks. Henry Paulson, the treasury secretary in the Bush Administration, appeared on national TV in July 2008 to declare that the US banking system is safe and sound. He added that the list of "troubled" banks" is small and the situation is very manageable. What he failed to mention was that the US bank deposit insurance fund, the Federal Deposit Insurance Corporation (FDIC) had a list of 117 problem banks. The list did not include banks such as Citigroup which made billions of dollars of losses and whose share has fallen from about $ 48 to less than $ 4 within one year. FDIC Chairman Sheila Bair said in 2008 that she expected turbulence in the banking industry to continue for some more years and more banks are likely to appear on the agency's internal list of troubled institutions.

Banking crisis is nothing new in the U.S. During the Panic of 1837, the U.S. banks were so deeply involved in speculation that President Andrew Jackson opposed renewal of the Second Bank of the United States. Out of 850 banks in the United States at the time, 343 failed. Another 52 failed partially. During the Panic of 1873, U.S. banks got heavily involved in speculations in rail road bond. When there was an economic downturn, the Jay Cooke Bank failed to sell the bonds and failed. This led to a chain of bank failures. During the Panic of 1893, caused by the collapse of the Northern Pacific Railway, the Union Pacific Railroad and the Atchison, Topeka & Santa Fe Railroad, about 500 banks went bankrupt. During the Panic of 1907, which is also known as the "Banker's Panic", the banks had lent recklessly to investors in stock markets. The Knickerbockers Trust Company, New York City's third largest trust company collapsed. This spread fear throughout the city's trust companies as regional banks withdrew their reserves from New York City banks. The State Savings Bank of Butte Montana went bankrupt. Runs occurred at Morse's National Bank of North America and the New Amsterdam National, Mercantile National Bank of New York and many others. Banks lent heavily to stock market investors in the Roaring Twenties. When the stock market crashed in 1929 and the Great Depression followed, over 5000 banks went bankrupt. 91 banks failed along with a large number of Savings and Loans Associations during the Savings and Loans Crisis during the Regan Presidency. Another 540 banks were in trouble. The Continental Illinois National Bank and Trust Company, the nation's seventh-largest bank with $45 billion in assets, failed in 1984 and was subsequently bailed out. The Sub-Prime Crisis claimed the major investment bank, Lehman Brothers and Washington Mutual as well as mortgage bond holders Fannie Mae and Freddie Mac. All major banks like bank of America, Citibank, Morgan Stanley, and Goldman Sachs were in serious trouble and survived due to a $700 billion government bailout.

Banking in Europe is more conservative. But the lure of high profits is contagious. They started investing heavily in derivatives and the US Sub-Prime debt instruments. Barings Bank went bust in 1995. Banks in Europe, from Greenland to Spain made huge losses when the Sub-Prime bubble burst and required governments to bail them out.

Bankers are supposed to be conservative and risk averse. But most modern bankers are just the opposite. The Chairmen, CEOs and senior staff with multi million dollar packages are under enormous pressure from shareholders to earn profit. They tend to lend without assessing the repaying abilities of the borrower and the quality of the collateral securities if any. To make matters worse, their cash to deposit and reserve ratios are very low and they borrow from wholesale lenders and lend to retail lenders at higher interests. So when there is an economic slow down and borrowers begin to default on a large scale, banks get into trouble. When the banks default on payments to the wholesale lenders, there is further melt down of the kind we saw during the "Great Depression" of 1929 to 37, depression of 1982-83 or during the Sub-Prime Crisis of 2008.

Lack of Regulation and Monitoring

Most obvious and accepted reason for the collapse of the US and European banks and investment banks has been the lack of control and monitoring by the Fed or the central banks. Under the neo liberal capitalist policies introduced by President Regan and followed by the subsequent US Administrations, the US economy had been almost completely deregulated. Federal authorities responsible for monitoring the policies and practices of banks and their financial health looked the other way while banks threw prudence and safe banking practices to the wind and found devious but risky methods to increase profits. Every thing seemed fine when the banks made profits. When the housing bubble burst and the sub prime crisis started, the house of cards just collapsed. Millions of investors lost their future and the poor tax payers in Europe and America had to bail out the banking system to the tune of over a trillion dollars.

Non Performance of Raring Agencies

Rating agencies are supposed to provide risk warnings to the investing public with their ratings. These agencies like Fich, Moody's and Standard and Poor, deliberately or negligently kept grading sub prime mortgage related securities as very safe till they started to sour. Then, all of a sudden, they downgraded banks and financial institutions creating panic in the investing public who rushed to withdraw their saving and redeem their investments. Withdrawals and redemptions left some of the banks cashless causing them to collapse.

Government Attempts to Boost Economy

Whenever GDP growth slows down, governments attempt to boost growth with stimulus packages, low interests etc. This creates excess liquidity with investors and banks. The extra money is most invested in real state and the share market.

As re-election approached, President Carter relaxed regulatory supervision on banks in 1980 in an attempt to simulate the economy. Banks lent money with great abandon to finance real estate deals inspired by tax rebate on house purchases. Recession manifest itself due to rising oil prices during the first two years of the Regan Presidency. Real estate prices collapsed due to the recession. Collapse of real estate prices caused the Savings and Loans Crisis of the 80s and to the Sub-Prime Crisis of 2007.

After the terrorist attacks on Sept. 11, 2001, the Fed lowered its benchmark rate to 1 percent and promised in advance to keep it there indefinitely to create a security blanket of continuous cheap credit. The strategist behind that step, Alan Greenspan, then the Fed chairman, is now widely blamed for keeping money too cheap for too long, inflating the real estate bubble whose bursting is now wreaking so much havoc in the United States and elsewhere. Excessive liquidity and cheap credit led to a bull runs on the stock market and a boom in the property market. Investors tried to replicate success stories. Share prices hit all time highs which could not be sustained. More houses and commercial spaces were constructed than what can be sold. Services like restaurants, air lines have excessive capacity. Suddenly the house of cards collapsed. The economy went from boom to burst. We had the Asian crisis in 1998, the bursting of the Dot.com bubble in 2002 and the bursting of the housing bubble in 2007. And when the bubbles burst, the ordinary Americans suffer the most pain.

Governments across the world agreed on Monday 13 September 2008 to shore up confidence in tottering global banks and stave off the world's worst financial crisis in 80 years. Bank of England, European Central Bank and Swiss National Bank decided to work together to protect the European banks. The UK government decided to invest $ 64 billion in ailing British banks Royal Bank of Scotland and Lloyds TSB. The UK Government became the largest share holder in Royal Bank of Scotland and mortgage lender HBOS. The French, German and Spanish governments have committed $ 1.3 trillion to guarantee inter bank loans and take equity stakes in banks up to 3 percent of their GDP. German government has decided to earmark about $ 700 billion in guarantees for troubled banks till December 2009. Qatar launched a plan to purchase shares in listed banks to the extent of about $ 5 billion. Mitsubishi UFJ Capital has agreed to provide $ 9 billion US to Morgan Stanley against a Federal guarantee. The Fed has also bailed out Citibank with a multibillion dollar bailout and a $306 billion guarantee of its assets.

Globalization

The concept of Globalization of the world economy was thought out by the Washington Consensus to perpetuate US domination of the world economy. WTO was established to replace GATT as the international organization which is to govern world trade. The basic aim of economic globalization is to open up the entire world economy by removing trade barriers imposed by Developing Countries through import restrictions, duties and restrictions on inflow of foreign capital. The US is by far the richest country and controls the world economy with the support of its allies and bodies like the International Monetary Fund (IMF), World Bank and World Trade Organization (WTO). So the US wanted to manipulate the world economy so that it is adapted inextricably to suit the US and European investors and their transnational corporations. Under globalization most profits go to groups of American and European investors and corporations.

Globalization is designed to weaken the powers of individual countries to control their own destinies and major decisions are increasingly made at the global level by WTO, IMF or World Bank. The influence of national governments is reduced. Actions by these countries to control their balance of payment or currency problems, if in contravention of the WTO rules can be referred to the WTO, which can impose hefty penalties. These rules also apply to the US. The American Government cannot stop imports or increase duties to make American products more competitive. They cannot restrict imports to save American manufacturing or to create jobs.

Globalization affects rich and poor nations alike. In an environment with reducing government controls, American and European companies rather than governments make investment decisions for establishment of manufacturing facilities. So a nuclear power plant or a steel plant has not been set up in the US since the early seventies. Because of availability of cheap labor and requirement of less investment, more and more American and European companies are setting up manufacturing or out sourcing facilities in developing countries. This is increasing their profits but leading to job losses in the US and EU. Job losses reduce the government's tax income and increase the burden on governments due to payment of unemployment benefits. The slow disappearance of well paid jobs in the developed world is working to the advantage of a few countries like China, India etc. This is creating serious difficulties for labor force of the developed world. For the majority of the population in the US, wages have stagnated or declined in the last 25 years while working hours and insecurity has greatly increased.

It appears that the forces of globalization unleashed by the US for short term economic gains are going to prove similarly disastrous for it in the long run. Globalization has not reversed the pattern of poverty for 30 per cent Americans and Europeans. It is only accentuating it. The U.S. and European markets are flooded with Chinese and Asian imports. Italian Finance Minister Guilio Tremonti warns about the down side of unbridled free trade with China in an interview with Times Magazine by saying: _"Italy is particularly vulnerable because so much of our industrial production comes from mid level to relatively low technology and also because of the high cost of Labor.... My position isn't against the Chinese. They look out after their own interests, and Europe (and America) should simply do the same..... We have too many rules coming from Brussels on business. There is an almost obsessive quantity of rules. Yet we freely import from countries which do not have any of these rules."_

Economic power is shifting towards the top economic performers amongst the developing countries, particularly in Asia. With domestically available cheap and highly skilled work force and cutting edge technology from the transnational corporations from the developed world, their products are more competitive than products produced in the developed world. Thus factories producing cars are closing in the U.S. and Europe and opening in China and India. In fact even high-tech services like Information Technology, research and development, healthcare, business processes are being increasingly outsourced to the so called Third World countries. There is no doubt that U.S. and European multinational companies and investors will continue to make substantial profits. But the U.S. and European economies will suffer from the millions of job losses that are bound to occur as manufacturing activity declines in the west and increases in the east. The U.S. and E.U. will find it extremely difficult to abolish farm and export subsidies and compete with countries like China, India and a host of developing countries. Abolishing these subsidies could be fatal for the developed world. Unless something is done, US and Europe will become third world countries.

Globalization is not working for the U.S. or Europe. Like many other strategies born out of capitalist greed, globalization is bound to fail. U.S. and European economies can thrive only if they can find a way to find a way to globalize trade without hurting its own citizen. It should consider scrapping WTO and going back to GATT. If it can't, the American people will have to step in and boycott imported goods and services. "Be American Buy American" should be the clarion call of the American people.

Out sourcing

Neo liberal economists have calculated that every high productivity high paying job that is shipped out of the country is a net gain for America and Europe (net gain for American and European companies as additional profit). We are getting things cheaper and the consumer is benefited, they say. What the cheaper goods argument overlooks is the reductions in the productivity and pay of highly qualified, employed Americans and Europeans. What is the point of higher education when the job opportunities in the economy do not require it?

Neo-liberal capitalists accept that 3 million or so jobs in manufacturing in the U.S. were lost from 2001 to 2007. They claim that 8 million jobs were gained in the rest of the economy, for a net gain of 5 million jobs. The fact is that there is no correlation between jobs lost in manufacturing and jobs gained in service industries like retailing and hospitality. Further, most new jobs have been created in the services sector and are low skill and low paid. Are America and Europe destined to become nations of HNWIs, sales persons and waiters? Back in 1955, 31 percent of all U.S. jobs were in manufacturing. Today, that figure is only about 10 percent. It is true that the service sector has been growing during the last 50 years. But that has not been the reason for demise of American manufacturing. The reason is shifting of manufacturing to developing countries by American and European companies in search of greater profits. 70 percent of goods sold in Wal-Mart Stores in the US are manufactured abroad. This started with economic liberalization, privatization and globalization from 1980 with the onset of the Regan Administration. Off shoring has not been restricted to low- technology manufacturing industries. Automobile manufacturing has already been shifted. Unless stopped, it is only a matter of time before Boeing and Air Bus shift aircraft manufacturing to China, India or Brazil. The pressure of globalization has wreaked the American labor market. Factories are still closing, retailers are shrinking. Finance, information technology and insurance sector jobs are also being out sourced to reduce costs and increase corporate profits. Despite the success of companies such as Google and Yahoo, software, semiconductors and telecommunications have lost more than 1.1 million jobs between 2001 and 2007. These businesses employ fewer Americans today than they did in 1998, when the Internet business boomed.

Making the Investor the King

The private investors of the world have most of the investable surplus funds. Governments of most nations of the world have a deficit budget and are short of investable funds. It is therefore only natural that the global investors try to put pressures on the governments of the developed and the developing world to grant them concessions in return for investing. In America we have WIN, an associations of American corporations who parked their profits abroad, who are trying to convince the U.S. government to allow them to bring the money into the country by paying a 5 percent tax instead of 18 to 20 percent as required by present law. This kind of tax break is the main cause of the woeful state of government finances around the world. If the corporations gang up and form cartels, why cannot governments gang up and pass similar taxation laws and launch a war on tax havens and tax cheats?

Conclusion

Non availability of slaves and colonies is the primary cause of the decline of the economies of the developed countries. But that cannot change. What can change are government policies in the developed world which benefit the rich and the corporations at the expense of the middle class, working class and the poor. Per capita incomes may grow a rate of about 2 percent. But that growth is due to the 8 percent growth in the incomes of HNWIs and not due to increasing incomes of the bottom 60 percent of these countries. The financial conditions of central governments, state governments, town councils and municipalities are not going to improve unless there is a major change in economic policies of the developed nations.

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Chapter 8; Strategy for the Future

" _The Mirage of American Economic invulnerability has vanished, along with much of the savings of thrifty and prudent men and women.... We need to correct, by drastic means if necessary, the faults in our economic system from which we now suffer._ " President Roosevelt During a campaign speech during US presidential elections of 1932

No American or European leader has, in recent times, admitted to the seriousness of the economic problems of rising budget deficits, trade deficit, unemployment, poverty and the inherent weakness in their banking and manufacturing sectors. They have one solution; austerity in public spending and tax breaks and bailouts to the rich and the private sector. They have been trying this policy for decades without success. They can be expected to continue in the same vane till social unrest on a large scale forces them to think of alternatives.

A patient can only be saved if the problem is correctly diagnosed. In Chapter 7, we have tried to discuss the reasons for the decline. The author does not believe that the solution lies in continuing with free market reforms and globalization. Some solutions to the problems are suggested in the succeeding paragraphs.

Devalue the U.S. Dollar, Euro and the British Pound

We have seen while discussing the causes of the decline of economies of the developed countries that the arbitrary or so called market driven over valuation of the U.S. Dollar, British Pound and the Euro makes the labor and products of the developed nations uncompetitive. To make manufacturing and businesses in the developed world capable of competing with the developing world, these currencies have to be devalued. The extent to which devaluation is necessary is a matter of judgment or trial and error. To start with, a 20 percent devaluation can be tried out for a few years. Further devaluation can be carried if found necessary for revival of domestic manufacturing and business processes which is the only sustainable way to create jobs and reduce unemployment.

Strengthen Regulation and Monitoring of Banks and Stock Markets

Deregulation of banks and "Savings and Loans Institutions" had been started by Jimmy Carter in 1980. The policy of deregulation of banks and financial institutions was continued vigorously by Regan and his successors. Banks have been lending money for speculative businesses. Whenever speculative businesses failed, banks and financial institutions collapsed. It happened in 1982 and 1983. It happened again in 2008.

Fraudulent accounting practices in corporate America are more common than most would care to admit. One classical example is that of Refco Bank which went burst in 2005 and was the fourth largest US bankruptcy case. The US government investigation revealed that Refco and its customers had built up heavy losses in the mid 1990s when the company was privately owned with Phillip Bennett as CEO. The firm went public in 2005 but filed for bankruptcy weeks later after a $430m fraud was revealed in its books. The fraud was investigated and Phillip Bennett pleaded guilty to conspiracy and fraud charges. This is just one of many instance of collapse of an American bank due to fraud. Many of the banks and financial institutions which have collapsed recently are being probed by FBI and action may be taken against some CEOs. But prevention is better than cure. Banks and stock markets must be properly regulated so that the bank collapses can be avoided and confidence in banking and financial corporations can be restored.

Recapitalize the Surviving Banks

The chairman of the Fed in the 1920s, Benjamin Strong, foresaw the potential for a banking crisis that would interrupt lending and he was one of the few Americans to understand that financial ties between the United States and Europe. The solution to economic crisis, in his words, was for central banks to "flood the streets with money." Strong died in 1928, too early to experience the monetary crisis that followed when the Fed reined in lending in response to the stock market crash of 1929. But Roosevelt created the FDIC and bailed out banks and restored the confidence of the public in banks. Regan Administration also bailed out banks and "Savings and Loans Institutions" in the wake of the banking and "S&Ls" crisis of 1983.

Banks of today have to shed losses linked to the lifeless U.S. and Spanish housing markets and threats of sovereign default and recapitalize, either by attracting new investors or by selling themselves to stronger institutions. But the process is not easy. Lehman Brothers and Washington Mutual, the largest savings and loan bank in the United States and once among the most successful financial institutions in the country, tried to sell themselves to a stronger bank but failed. The bail out plan which visualizes purchase of bad loans from bank is sending good money to save bad money. The central banks must not buy bad loans but buy stakes in the banks which they can sell when things improve.

Nationalize failing Banks

Governments of developed countries should nationalize failing banks instead of refunding deposits up to the statutory limits. It will save jobs. It will also save money that FIDIC or equivalent institutions in Europe have to pay the depositors of failed banks U.K. nationalized Royal Bank of Scotland in the wake of the Sub-Prime Crisis. Public sector banks may be anathema to private sector banks of the developed world as a source of painful competition but they are doing fine in the developing countries like China and India

Control Speculation

Speculative activity in commodities has many harmful effects on the economy. The first ill effect is unwarranted rise in prices. How else can one explain the drop in crude oil prices from $ 140 per barrel to less than $ 50 per barrel in less than one month? The fall in prices of most commodities throughout the world clearly shows that price rises are mostly the effect of speculative deals on the commodity exchanges of the world. Ideally commodity exchanges should be banned. But if that is not possible, transactions at the exchanges must be heavily taxed and effectively regulated. All transactions must be delivery based. Failure to take delivery must invoke punitive penalties.

Speculative activity in shares and derivatives can also have disastrous effect as we have seen during the share market crashes of 1929, the Dotcom bubble of 2000 and the Sub Prime Crisis of 2007-08. Sale of share must also be delivery based with a minimum holding period of one month. There should be a transaction tax on browses of about 0.01 percent. Profits and short term capital gains must be taxed at the highest rate. Short selling must be totally banned. The markets must be properly regulated. All defaults, insider trading and irregularities must invoke punitive penalties. If flow of excess cheap money into speculative business can be stopped, it will automatically get channeled into productive investments and create jobs.

Derivatives need to be banned or more effectively regulated. Recently, J.P. Morgan Chase, the largest bank in the United States, admitted that its loss from a highly publicized trading blunder had grown to $4.4 billion, more than double the bank's original estimate of $2 billion. Similar trading losses have been made by many investment banks like BNP Paribas, M F Global. Barings Bank (1762 to 1995) was the oldest merchant bank in London until its collapse in 1995 after one of the bank's employees, Nick Leeson, head derivatives trader of the bank, lost £827 million ($1.3 billion) due to speculative investing, primarily in futures contracts, at the bank's Singapore office.

Increase Interest Rates

Cheap credit encourages consumption and speculation with borrowed money. Consumption with borrowed money is bad for the society. People under debt are more likely to take to crime. They are also more likely to neglect the needs of their children. Speculation with borrowed money is dangerous for the economy as they hurt the small investors when bubbles burst. High interest rate will encourage saving and make economically vulnerable people less dependent on speculation for returns on savings. Higher savings mean more money with banks to lend without excessive leveraging. The high interest regime is working fine in India.

The central banks can lay down low rates for lending to manufacturing and service industries which generate employment and lay down high rates above 12 percent for personal loans for consumption and speculation. But interest rates are set by people who run central banks and financial institutions. They are be influenced by "lobbying" by banks and corporations who want to maximize their profits. So such measures may be difficult to implement.

Crate a Vibrant Public Sector

Public Sector played a vital role in the reconstruction of Europe after the devastation of the World War II. Public sector played an important role in UK and France till the early 80s when neo-liberal economic policies of President Regan and Premier Margaret Thatcher led to large scale privatization of the public sector in Europe. Public sector continued to play a significant role only in France and some Scandinavian countries.

Public Sector in the developed world is currently restricted to government departments, education and healthcare. As government deficit mounts and austerity measures are put into effect, tens of thousands of the once middle class government workers, bus drivers, police officers, fire fighters, nurses, teachers etc. in the US and EU have been losing jobs since 2008.

But there are many public sector companies in the developing world which are engaged in a variety of commercial activities like operating banks, public transport systems, oil exploration and refining, mining, producing metals like steel, aluminum and producing medicines, vaccines etc. These companies are not government departments but limited companies run by professionals in which the government is the majority share holder. Public sector companies can be engaged in healthcare, insurance, infrastructure development, operating harbors etc. Public sector companies are anathema to neo-liberal economists and multinational corporations of the developed world. Such companies of the developed world like the railways, ports, industries and airlines run by the public sector have been sold off to the private sector. But public sector companies engaged in commercial activities have played a very important role in the growth of developing countries like China and India which enjoy the highest growth rates in the world today.

Public Sector companies have proved to be highly successful in combating high rate of unemployment, low levels of savings and lack of investment and weaknesses in infrastructural facilities in the developing world. The US and EU economies need a big push. This push is not coming from the private sector because of their unwillingness to invest funds in America and their unwillingness to take risk with large long-gestation investments. Hence, government intervention through public sector is necessary for economic growth in the US and EU to diversify their economies, to create jobs and to overcome economic stagnation and private sector excesses.

The public sector companies can be set up to promote rapid economic activity through creation and expansion of infrastructure; to promote redistribution of income and wealth; to create employment opportunities; to encourage the development of small-scale and ancillary industries and to act as an important instrument of self-reliance and economic sovereignty.

Necessity of Public Sector Companies

The main usefulness of public sector companies to a country's economy lies in investing in areas of the economy which do not interest the private sector. Some examples are given in the succeeding paragraphs.

Filling the Gaps in Availability of Capital and Consumer Goods and Services

Serious gaps have been created in the US and EU in availability of goods and services due to out sourcing and shifting of manufacturing and business processes to China and other developing countries. Private sector is not going to bring back their highly profitable business to the developed world. In America, steel, automobile and many other industries are going sick because of cheaper imports from China and other developing countries. Nationalization of such companies would ensure that jobs are protected and there is no disruption in availability of essential capital goods in time of war.

Generate Employment

Public sector companies have created millions of jobs in developing economies to tackle the unemployment problem in the country. The public sector accounts for about two-thirds of the total employment in the organized industrial sector in India. By taking over many sick units, the public sector has protected the employment of millions. Public sector has also contributed a lot towards the improvement of working and living conditions of workers by serving as a model employer and preventing exploitation of labor by private corporations. In the United States, the bailing out of General Motors, Chrysler and AGI saved hundreds of thousands of jobs. Nationalization of the Royal Bank of Scotland in UK also saved thousands of jobs which would have been lost if the bank had been allowed to fail. Nationalization of banks which fail in the United States could save jobs and payments by FIDIC. Such nationalized banks can turn profitable as we have seen in the case of General Motors and the Royal Bank of Scotland. They can be subsequently privatized by sale of shares and the taxpayer's money recovered.

Generate Income for Public Exchequer

Public sector companies which are well run generate cash reserves and pay dividends. Public sector enterprises in India have been making billions of dollars of contribution to the Government exchequer through payment of corporate taxes, excise duty, custom duty, dividends etc. The overall profits of all major Public Sector companies of India stood at about $20 billion during FY 2010 and the dividend declared by them stood at about $6 billion. These Public Sector companies earned foreign exchange equal to about $15 billion in FY 2010. In this way they help in mobilizing funds for financing the needs for the planned development of the country.

Reduce Concentration of Economic Power in the Private Sector

We have seen that from the time of President Andrew Jackson, American corporations have been challenging the authority of the U.S. Administration. A vibrant public sector in the United States would reduce concentration of economic power in private hands and increase government control over the U.S. economy. This could help make the economy more people oriented than profit oriented. For example, India, with its nationalized banks can ensure that these banks lend at low interest rates to poor farmers and small scale industries and small businesses which private banks with their profit orientation and risk aversion may not be willing to do.

Limitations and Abuses of the Private Sector

The behavior and attitude of the private sector itself is an important reason for the expansion of the public sector in the United States. In many cases the private sector could not take the initiative to take up infrastructure or manufacturing projects because of the lack of funds, doubtful profitability or their inability to take risk with large long-gestation investments. In a number of cases, the government should take over a private sector industry or industrial units either in the interest of workers or to prevent excessive exploitation of consumers. Very often the private sector does not function as it should and does not carry out its social responsibilities.

Enable Governments to Intervene in Economy and Boost Growth

During the recent global economic downturn, the Government of India was able through public sector banks to infuse capital into the economy in order to boost economic activity into sectors such as real estate, agriculture and small enterprises by providing capital at lower interest rates. These initiatives of the Government helped contain serious after effects of the global economic meltdown of 2008 while keeping a tab on inflation. In the absence of Public Sector banks, the American government was not in a position to directly assist the economically weaker sections of the society. The governments and central banks of the developed world could only bailout private banks and financial institutions whose greed and unethical or fraudulent actions created the financial meltdown in the first place. The bailout funds did not produce any economic activity or generate employment. They were invested in speculative activities in search of profits.

Limitations of Public Sector Companies

Despite their impressive role, Public sector companies, the world over, suffer from several problems and shortcomings. Investment decisions in many public enterprises are not based upon proper evaluation of demand and supply, cost benefit analysis and technical feasibility. Many projects in the public sector have time and cost over runs. Several public enterprises suffer from over-capitalization resulting in high capital-output ratio and wastage of scare capital resources. Manpower planning is not always effective and many public sector companies have excess manpower. Another serious problem of the public sector companies has been low utilization of installed capacity. In some cases productivity is low on account of poor materials management or ineffective inventory control. Sometimes there is lack of cost-consciousness, quality consciousness, and effective control on waste and efficiency. But the private sector is not perfect. Corporate greed and fraud also causes considerable turmoil in the economy of a country. The answer is to ensure good management of private sector companies and not to privatize them.

Need for Developing Public Sector Companies in the US and EU

The US and EU economies need a big push. This push will not come from the private sector because of their unwillingness to invest in low profit ventures and their inability or unwillingness to take risk with large long-gestation projects. Hence government intervention through public sector is necessary to revive economic growth, to diversify the economy and to provide employment to the millions of unemployed. Some sectors where public sector companies could be useful are:

Public Transport

A well developed public transport system reduces consumption of petroleum products, reduces traffic congestion in urban areas and reduces the expenses of commuting to work, shopping complexes or to college. It is a very important facility for the poorer sections of the society. Integrated urban transport projects combining Metro Rail Projects, mono rail and busses is one example. The best example of this combination can be seen in Singapore where possession of a car is not a necessity but a luxury.

Nationalization of Banks

The boom – bust cycle is well established in the United States. They are less frequent in Europe. Every bust phase sees the collapse of large number of banks. In the US, FIDIC steps in to pay each depositor up to $200,000 and thus spends billions of tax payer's money. European countries also have deposit insurance schemes. Why are these banks not nationalized? Jobs would be saved if they were nationalized and recapitalized with the same taxpayer's money. The deposits of these banks would be available to federal and state governments to finance infrastructure projects and investments in the priority sectors like education, and healthcare. UK did nationalize two banks in the wake of the Sub-Prime Crisis.

Nationalization of Bankrupt Companies

The best example of this strategy was nationalization of General Motors. Within three years of being forced into bankruptcy by the Obama Administration, it has emerged as the world's largest automobile manufacturer and all taxpayer's money invested in it has been fully recovered. If the government had held shares in the company, it would be getting returns on its investment and reduced its deficit.

Nationalization of Faltering Industries

Steel and Auto Ancillary industries of the United States are in trouble due to competition from the developing world. Their collapse would lead to huge job losses. These are strategic industries and vital to the United States in time of war. These should be nationalized on as required basis. Similar action can be taken in Europe instead of providing stimulus money to banks which do not create jobs but end up with speculators.

Infrastructure Development and Renewal

Much of the infrastructure in the form of roads and bridges in the U.S. were built in the 1930s during the period of the "New Deal" following the Great Depression. Most of these are now 80 years old and need renewal. This could be an area for deployment of Public Sector companies.

Conclusion

France carried out a very successful program of reconstruction and modernization under state coordination from 1944 to 1983. This program involved the state control of certain industries such as transportation, energy and telecommunications as well as various incentives for private corporations to merge or engage in certain projects. There was a short-lived increase in governmental control of the economy in 1981 when France nationalized many industries and private banks. This was criticized by the opposition in 1982. In 1983, the government decided to progressively reduce state control of the economy and start an era of corporatization. But government direction and planning played a greater role than in other European countries. Despite being a widely liberalized economy, the government continues to play a significant role in the economy. Government spending contributed 53 percent of GDP in 2001, the highest in the G-7. Labour conditions and wages are still highly regulated. The government continues to own shares in corporations in a range of sectors, including banking, energy production and distribution, automobiles, transportation, and telecommunications. These differ from countries such as the US or UK where most of these companies have been privatized.

The expansion of the public sector in developing countries like India and China was aimed at the fulfillment of their national goals of removal of poverty, the attainment of self-reliance, reduction in inequalities of income, and expansion of employment opportunities. They also helped in removal of regional imbalances, and acceleration of the pace of agricultural and industrial development. They helped to reduce the tyrannies of the private sector and prevent growth of monopolistic tendencies by acting as effective countervailing power to the private sector. In spite of their weaknesses, they have enabled many developing countries to achieve significant economic growth and rid them from dependence on foreign aid from the developed world. Even some small developed countries like Singapore have large public sector companies making substantial contribution to their economies.

The US and EU need to develop thriving public sector companies in banking, manufacturing, pharmaceuticals and public transport to revive economic growth, reduce unemployment and check the tyranny of the private sector. Nobel Prize winning economist Joseph E Stieglitz supports this view.

Conclusion

Learned economists and policy makers in the developed world may not agree with the suggested way forward. But one thing is certain; more of austerity in public expenditure, bailout of unscrupulous banks, tax breaks to the rich and big business, neo-liberalism and globalization is not going to work. One can repeat the dose till the patient dies. Or one can take a second opinion and try a new line of treatment

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Epilogue

America Administration may claim that US economy is the Worlds number one economy. That can be disputed. What cannot be disputed is that it has one of the highest percent of people living below the poverty line in the developed world. It also has one of the highest income disparities between the rich and the poor in the developed world. And the most amazing thing is that the American presidents don't seem to care, the US administrations don't seem to care, the American politicians do not seem to care American corporations don't care, American millionaires don't care and even about 60 percent of the American people living below the median income, and the working class and poor Republican supporters don't seem to care. Great American intellectuals like Jeffery Sachs are more worried about solving the poverty in the developing world rather than focus on stopping growth of poverty in his own country. American poverty and income disparity cannot be reduced by shipping jobs overseas, and replacing American workers with low cost immigrants.

Europe may try to bask in the glorious days of being colonial masters. But the colonies have become independent. Cheap raw material and agricultural products are no longer available. The captive markets for European manufactured products have disappeared. European and American manufacturing cannot compete with consumer durables and cars produced in the developing world and Japan. Government debts, trade deficits, unemployment and poverty are ballooning. No European leader seems to able to understand the problem All they can think of is more austerity, which actually means more job losses, more poverty and more misery for their people.

The truth regarding the exploitive nature of globalization is that it is controlled by the corporations, particularly multinational corporations. It is really interesting to see what American President Thomas Jefferson had to say about corporations.

" _I hope we shall... crush in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and to bid defiance to the laws of their country."-_ Thomas Jefferson, letter to George Logan. November 12, 1816.

Not only have we failed to full fill the hopes of the farsighted President, who foresaw the tyranny and power of the transnational corporations about two hundred years ago, we are allowing them to take control of our governments and our lives. The results of deregulation of the economy are before all of us. A large percentage of our leaders and government employees are on their covert pay rolls or accept funds for their election campaign or as bribes and do their biddings as corporate employees. Power and sophistication of the media controlled by the corporations produces evermore powerful ways of influencing how people think and what they believe. Big business distorts our perception of the truth. The impact of globalization so far has been to raise profits, strengthen the corporations and weaken the bargaining power of the workforce and governments. Unless the HNWIs and corporations can be regulated and taxed effectively, the U.S. and European governments will be bankrupt. The working class of these nations will face conditions reminiscent of the beginning of industrial revolution about 200 years back when there were no worker rights. The social conditions of the U.S. and Europe will be as depicted in Blake's "Dark Satanic Mills" or Charles Dickens' "David Copper Field". The HNWIs and the corporations aim to get rid of the welfare state for the workers, even though this would produce desperation, anxiety, hopelessness and fear in billions of unemployed and economic slaves.

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Bibliography

This book has primarily been researched from the web encyclopedia, wikepedia.org and other websites, books and magazines which are mentioned below.

Prologue

Chapter 1: Economy and Wealth of Nations

Chapter 2: Economic Growth and Decline of Europe

Chapter 3: Economic Growth and Decline of United States

"More than 100 US Banks in Trouble" Reuters (Singapore Times August 28, 2008); Greed Ails U.S. Economy **By Marie Cocco;** corporateinformation.com; "Bankruptcy Filings Surge to 1 Million" By Ben Rooney, CNN Money, Aug 27,2008; Forbes Asia Mar 24, 2008 issue; "The Price of Greed" by Andy Serwer & Allaon Sloan; "Govt Bailout: A US Tradition dating to Hamilton" by Michael Phillips, Yohoo Finance; "Bail out Nation" by Justin Fox Time Magazine September 22, 2008; "Oil's Washington Juggernaut" By Steve Hargreaves, CNN Money August 19, 2008; Networkideas.org lessons from Global Corporate Frauds by Jayanti Gosh; BankruptcyData.com

Chapter 4: Impoverishing Nations

infoplease.com; indexmundi.com /united_states/ gdp. Html; globalresearch. Ca; The Real State of the US Economy by Williaam F Engdahl, Global Research Aug 02.08, "It's Official: The Crash of the U.S. Economy has Begun" by Richard C. Cook"U.S. Economy: Stagflation is Here, and It is a Weapon of Mass Destruction", by Richard C. Cook, August 20th, 2008; "What Happened to the U.S. Economy?" by Harry Browne July 30, 2003; census.gov/foreigntrade/balance.htm; exportimportsuite101.com; US Global Trade Deficit by Countries By Daniel Workman 1 Feb 2008; History of Trade Deficit, US Department of State; USinfo .state.gov / infousa/economy

Chapter 5: Impoverishing the People

Bureau of Economic Analysis, US Department of Commerce, News Release August 2008; "Illegal Workers Weigh on Elections" By Caroline Hepker, BBC News 2 august 2008; Out Sourcing America: Job Loss and Unemployment By Norma Sherry; inhome.rediff.com; "House Republicans Move to Increase H1B visa Quota" By Michael Arington; techcrunch.com; "Research Finds US H!B visa holders paid less" 26. Oct 2005, workpermit.com; National Science Foundation website, nsf.gov/statistics/inbrief; "Unemployment Rate of US Scientists and Engineers Drops to a Record Low of 2.6% in 2006" by Nirmala Kannankutty, National Science Foundation News Release; "H1B Is Just Another Government Subsidy" By Paul Donnely, Computerworld.com; "H1B Computer Programmers" By John Miano, www.cis.org/article/2005

Chapter 6: Bonanza for the Rich

"No Tax Holiday for Corporate Job Destroyers" by Chuck Collins, 2001; "Welfare for Millionaires" News Week Magazine, Nov 14, 2011; "Corporate Campaign Cash Floods US Elections" by Tom Hamburger; August 2, 2010 in the Chicago Tribune; opensecrets.org; "A List of Corporate Lobbying" by Jill Richardson, La Vida Locavore, June 18, 2009; Institute for Policy Studies report, _America Loses: Corporations that Take Tax Holidays Slash Jobs_ _._ Ips-dc.org Heritage.org Brian Reidel, June 20, 2007; wg.org/farms

Chapter 7: Causes for the Decline

Chapter 8: Strategy for the Future

bifr.nic.in; heritage.org; "We need to correct the faults in our economic system, Roosevelt had told the US", Associate Press; "A lesson Rooted in the Great Depression" by Carter Dougherty, Sep 18, International herald Tribune; "How the Next President Should Fix the US Economy" by Justin Fox, Time Magazine June 2, 2008, Contactsingapore.sg/industries/public_sector; publicsector.co.uk; publicservices.co.uk; nytimes.com/2011/11/29/us/as-public-sector-sheds-jobs

About the Author

Bhaskar Sarkar was born at Calcutta, India in 1940. He graduated in civil engineering in 1963 and joined the Corps of Engineers of the Indian Army and hung his boots after 28 years of distinguished service in the rank of Colonel. A keen student of military history, economics and international affairs, he has eleven published and a few unpublished books to his credit. The author has published a number of E books. You can view these at Author Profile: <http://www.smashwords.com/profile/view/Bhaskarsarkar1940>

Pakistan Seeks Revenge and God Saves. India ISBN 81-85462-11-9. Fiction.

Tackling Insurgency and Terrorism. ISBN 81-7094-291-8. Non fiction.

Kargil War, Past Present and Future. ISBN, 1-897829-61-2. Non Fiction.

Outstanding Victories of the Indian Army. ISBN 1-897829-73-6 . Non Fiction.

Thirty Nine Steps to Happiness. Non Fiction. 81-248-0142-8

President Takes Over. Fiction. (Unpublished)

Practical Approach to Vaastu Shastra. (A Peacock Book)

Earthquakes, All we need to know about them. ISBN 978-81-248-0188-8. Non Fiction.

**Decline and Fall of the American Empire. Non Fiction. (Unpublished)**

**Nationalism: Economic Strategy for Survival of Developing Countries. ISBN 978-81-269-1093-9.**

**An Introduction to Religions of the World. ISBN 978-81-269-1339-8. Non Fiction.**

**Can the American Economy be Saved? Non Fiction. (Unpublished)**

**Who is Afraid of the Chinese Dragon? I am. Non Fiction. (A Peacock Book)**

**Tackling the Maoist Menace. ISBN 978-81-269-1636-8. Non Fiction.**

**Prevention, First Aid and Treatment of Diseases with Homeopathy. (On offer)**

**The Laments of a Rational Pessimist. (On offer)**

The published E Books of the Author are:

Fight Class War Now: http://smashwords.com/b/206829

Be A Rational Pessimist: http://smashwords.com/b/177158

Occupiers of Wall Street: Losers or Game Changers: <http://smashwords.com/b/175532>

Homeopathy for Prevention of Diseases and Self Medication: http://smashwords.com/b/229505

