In this issue:

End-of-Year Massacre at White House: Economic Chieftains Dumped--Will Bush Change Course?

Official Unemployment Soars; 'Authoritative Experts' Express 'Shock'

The Unemployed Are Staying That Way

Special EIW Report: U.S. Budget Deficit Is Out of Control

U.S. Highly Dependent on Capital Gains Taxes

U.S. Budget Crunch Begins To Take its Toll

Food Stamp Usage Is on the Rise as Depression Deepens

WALL STREET POLICE BLOTTER


From Volume 1, Issue Number 40 of Electronic Intelligence Weekly, Published Dec. 9, 2002

U.S. ECONOMIC/FINANCIAL NEWS

End-of-Year Massacre at White House: Economic Chieftains Dumped--Will Bush Change Course?

Reflecting the Administration's growing nervousness over the sinking economy, was the shakeup in the Bush Cabinet that took place Dec. 6: Treasury Secretary Paul O'Neill and Chief Economic Adviser Larry Lindsey announced their resignations within minutes of each other, just after just the news was released that the unemployment rate for November surged to 6% (see below), adding to an already stunning series of disastrous economic reports, including the pending bankruptcy of the nation's second-largest airline (see INDEPTH). Most Washington insiders report that President Bush had asked for the resignations Dec. 4.

O'Neill, the first Cabinet official to leave, announced his resignation in a terse letter to Bush, to take effect within a "few weeks," according to a Treasury spokeswoman. Lindsey, head of the White House's National Economic Council, is expected to leave at the end of the year, said White House spokesman Ari Fleischer.

The Washington Post reported Dec. 7 that Bush made the decision to purge his economic team earlier in the week, at a meeting with top political guru Karl Rove, Chief of Staff Andrew Card, and Card's deputy Joshua Bolton. According to Reuters, citing an unnamed Republican source with close ties to the Administration, Vice President Dick Cheney played a key role in the shakeup, telling O'Neill in a face-to-face meeting on Dec. 5, that he had to go.

O'Neill is expected to be replaced by a corporate CEO, while the top candidate to replace Lindsey is reportedly Stephen Friedman, former co-chairman (with Robert Rubin, who was a Clinton-era Treasury Secretary) of Goldman-Sachs investment bank--indicating both Wall Street and Main Street are "satisfied."

Some expressed hope that the shakeup will change the Administration's economic course: "I hope this represents an acknowledgement by the President that his Administration's policies have failed to produce economic growth and create new jobs," commented Rep. Charles B. Rangel (D-N.Y.).

But, according to the Washington Post, Administration officials and GOP economists cautioned against expecting radically new policies. In fact, the only "radically new policies" on the table that have any hope of getting us out of this crisis, are the FDR-style recovery policies proposed by Democratic Presidential pre-candidate Lyndon LaRouche.

Official Unemployment Soars; 'Authoritative Experts' Express 'Shock'

Official U.S. unemployment rose from 8.209 million workers in October, to 8.508 million in November, an increase of 299,000 workers, the Department of Labor Bureau of Labor Statistics (BLS) reported Dec. 6. The official unemployment rate also jumped from 5.7% in October to 6.0% in November. This is the highest official rate in eight years. In reality, EIR has determined that real unemployment is twice what the BLS has told the public.

The "authoritative experts" expressed "shock" at the increase. The Washington Post electronic website headlined its article Dec. 6, "Unemployment Rate Unexpectedly Surges," noting that the Labor Department report "portrayed a bleak snapshot of the U.S. economy at a time when many analysts had thought that the rock-bottom days for job seekers were behind them." A red-faced Bloomberg News Service admitted: "Only five of the 60 economists surveyed [before the report] expected a drop in unemployment [in November]."

The BLS also reports a "household survey," according to which, the level of employment, plunged from 134,915,000 in October, to 134,225,000 in November, a loss of 659,000 workers in November. Some of these workers were counted in the official unemployment figures in November (299,000); but the remaining workers, who were part of the drop in the November employment, by the "household survey," left the labor force. The catch is, when a worker leaves the labor force, he or she is no longer counted as unemployed. These workers were not counted as unemployed.

Furthermore, unemployment continues to strike the manufacturing sector. November marked the 28th straight month in which the U.S. manufacturing workforce declined. During November, the manufacturing sector eliminated 45,000 jobs, of which 36,000 were manufacturing production jobs, those workers who physically alter nature to improve mankind's existence. Since July 2000, the U.S. has eliminated 1.992 million manufacturing jobs, of which 1.583 million were production manufacturing workers. This is an accurate barometer of the breakdown, as Lyndon LaRouche has discussed, of the physical economy.

The Unemployed Are Staying That Way

The average duration of unemployment is at its highest level in over eight years, as fewer people are finding jobs, even though new claims for unemployment are falling, wrote Irwin Kellner of CBS Marketwatch Dec. 3. Of those officially counted as unemployed, 36% have been without a job for 15 weeks or more--the highest percentage since 1991. Moreover, according to National Public Radio's Marketplace, 20% of those unemployed have been without work for six months or more--not since the recession of 1981 has it been this bad. There are 8 million jobless competing for 3.5 million jobs, and former skilled high-tech workers are accepting minimum-wage jobs at 7-11, etc. This, along with the fact that by January, 1 million unemployed Americans will be without unemployment insurance, following the failure of the Administration and Congress to act before Congress left town, to extend benefits to those whose payments are expiring.

Special EIW Report: U.S. Budget Deficit Is Out of Control

The United States is poised to run a fiscal year 2003 budget deficit of between $400 and $500 billion. The deficit is caused primarily by a collapsing level of revenue: In FY 2002, the U.S. experienced the largest single yearly collapse in individual income tax revenues--in both absolute amount and in percentage--in 70 years. Thus far, for FY 2003, this sharp revenue drop continues.

Table 1
U.S. General Revenue Budget Deficit Has Swelled
($ Billions)
Fiscal Year
Real Federal
General Revenue Budget
Sham Federal "Unified Budget"
1965
-1.6
-1.4
1970
-8.7
-2.8
1975
-55.3
-53.2
1980
-72.7
-73.8
1985
-221.7
-212.3
1990
-277.8
-221.2
1992
-340.5
-290.4
1995
-226.4
-164.0
1998
-30.0
69.2
1999
1.8
125.5
2000
86.6
236.4
2001
-33.4
127.1
2002
-317.3
-157.7

source:
U.S. Office of Management and Budget; U.S. Treasury Department; {EIR}

In the 1980s, the Reagan administration created the sham "unified budget" which mixed the actual Federal General Revenue budget with the surplus of the Social Security fund, in an attempt to make the budget deficit appear smaller than it actually was. Table 1 shows that in 1965, before the post-industrial society policy took full effect, the deficit was only $1.6 billion (the sham "unified budget" deficit was only $1.4 billion). The implementation of a series of measures--the Volcker October 1979 "controlled disintegration" policy under President Carter; the 1981 Kemp-Roth Tax Act; the 1982 Garn-St Germain bank deregulation act, etc.--caused the U.S. budget deficit to swell, reaching a record level of $340.5 billion in fiscal year 1992 (the last budget produced by President George H.W. Bush).

During the second half of the 1990s, the U.S. budget took in huge revenues, largely from taxation of the portion of the economy represented by the speculative bubble. This brought down the size of the general revenue budget deficit; in FY 1999 and 2000, principally taxation of the speculative bubble caused an apparent and fleeting budget surplus.

U.S. Highly Dependent on Capital Gains Taxes

Dependency on revenues from capital gains taxes turned into an addiction, which set up America's budget for a fall. During the past two and one-half years, the simultaneous blowing out of capital gains, and of the physical economy, collapsed budget tax revenues.

Table 2
Capital Gains, and Taxation of Capital Gains
$ Billions
Realized Capital Gains

U.S. Taxes from taxation of Realized Capital Gains

1990
124
32
1995
180
40
2000
644
121
2001*
322
102
2002*
322
66
*estimated

(In the above table, realized capital gains are expressed on a calender year; taxes from realized capital gains are expressed on a fiscal year.)

Table 2 shows that, fed by the stock-market bubble, the realized-capital-gains bubble leapt from $180 billion in 1995, to $644 billion in fiscal year 2000, more than a threefold increase. U.S. taxes from capital gains climbed from $40 billion in fiscal year 1995, to $121 billion in fiscal year 2000, an increase of $81 billion. This and the taxation of other speculative sources, produced the apparent and fleeting budget surpluses of 1999 and 2000.

The collapse of the stock market, starting in March 2000, caused the realized-capital-gains bubble to pop, and taxes from realized capital gains plunged. After discussions with relevant government sources, EIR estimates that capital gains taxes plunged to $66 billion in fiscal year 2002.

A twofold process hit individual income taxes. First, capital-gains taxes plunged. Second, during the past two years, several million workers lost their jobs, and many additional workers suffered wage cuts. This greatly reduced income taxes from wages and salaries. The twofold process caused a huge drop:

-

Table 3
Fiscal Year
Individual Income Taxes Paid to U.S. Government
($ Billions)
2000 1004.5
2001 994.3
2002 858.3

Source: U.S. Office of Management and Budget; U.S. Treasury Department

Table 3 shows individual income taxes fell from a level of $994.3 billion in fiscal 2001, to $858.3 billion in fiscal year 2002, a fall of $136 billion, or 13.7%. This is the steepest fall by absolute amount and by percent, in 70 years. This is the major reason that, as Table 1 shows, the U.S. general-revenue budget deficit swelled to $317.3 billion in fiscal year 2002, the second-highest annual deficit in U.S. history.

The U.S. general-revenue budget deficit reached $57.7 billion in October 2002, the first month of FY 2003. As the meltdown of the U.S. economy accelerates, the more revenues collapse, on the one side; and the more expenditures for programs like unemployment insurance and food stamps grow, on the other. Thus, there is no limit to how big the budget deficit will grow. The FY 2003 Federal budget deficit is on a path to hit between $400 and $500 billion; but as shock waves hit the system, the deficit could become even larger.

U.S. Budget Crunch Begins To Take its Toll

Refusing to face up to the gargantuan budget deficit, the lame-duck Congress went home without passing any of the 13 major appropriations bills. This has already begun to take its toll on many Federal as well as state programs; many states depend heavily on Federal revenue sharing. Some of the fallout:

*According to the Washington Post Dec. 4, "Already Federal courthouses across the country have been told to freeze hiring of support staff, delay purchases of furniture and equipment, suspend some travel, and put off building maintenance and repairs, said Dick Carelli, spokesman for the U.S. Administrative Office of the Courts."

*A typical case of a state in crisis: Indiana has had no revenue growth for two years, and has announced an $800-million deficit for this fiscal year; it was depending on Federal aid to bridge the gap. Without it, road projects are on hold; state police DNA testing on 758 cases won't be funded; and some Medicaid and other social-service programs, and a health-care plan for 50,000 children of the working poor, will be reduced. Once Congress refused to approve a 13-week extension of unemployment benefits, 10,000 Hoosiers will be without any income as state funds are gone.

*President Bush vetoed a 4.0% pay increase for Federal workers which was to take effect Jan. 1, instead limiting it to 3.1%.

*The Department of Justice's Office of Justice Program, which was to aid law enforcement, has not received required funds.

Food Stamp Usage Is on the Rise as Depression Deepens

Between July 2000 and August 2002, the number of Americans relying on Federal food stamps increased by 2.8 million, bringing total participation to 19.7 million people. Even more telling, is the fact that 86% of that increase, or 2.4 million people, took place in the last 17 months, i.e., between March 2001 and August 2002, according to a recent report issued by the Center on Budget and Policy Priorities. (March 2001 is the arbitrary date set by the National Bureau of Economic Research for the start of the recession, and August 2002 is the latest month for which there are data on food stamps.)

Despite claiming "it is not possible" to know "what caused the increase," the authors debunk a few of the standard myths. For example, the usual "seasonal trend" of decreased usage in summer months doesn't hold, as usage didn't decline between May and August 2002, "but rather rose to its highest level since April 1998." Or that changes in eligibility, i.e., restoring access to legal immigrants and modest benefit improvements, caused the increase. The CBPP authors write that these changes "do not explain the increase," as the "majority of [them] are optional" and could not even be implemented now.

Beginning to face reality, the authors state, "Much of the increase in food stamp [use] came as the unemployment rate was rising." The report notes that unemployment "rose steadily through 2001," and "fluctuated in 2002" but stayed in the high 5% range. Yet, the real explosion in usage will be seen as the September and October data become available, as they confess, "Increases in food stamp [use] often occur slightly after the unemployment rate rises," which it did in those two months.

Here are some details of the report:

*In 48 out of 50 states and the District of Columbia, food-stamp use grew by 10.9% from August 2001 to August 2002. Data from the U.S. Department of Agriculture and analyzed by the CBPP show that over this period, the number of people using food stamps grew from 17.6 million to 19.7 million. The figures reported below show that usage increased in five states by more than 20%, in 11 states by more than 15%, and in 16 states by more than 10%. Twenty-nine states were above the 10.9% national average.

*States with 20% or more increase:

Alaska (20.4%); Arizona (28.5%); Delaware (29.7%); Nevada (30.1%); and Oklahoma (27.1%).

*States with 15% or more increase:

Colorado (16.2%); Idaho (19%); Indiana (15.9%); Kansas (17.6%); Kentucky (15.6%); Oregon (18.1%); South Carolina (17.3%); Tennessee (15.1%); Texas (15.4%); Utah (17%); and Wisconsin (17.8%).

*States with 10% or more increase:

Florida (11.1%); Georgia (12.8%); Iowa (11.3%); Louisiana (14.5%); Maryland (11.1%); Massachusetts (14.7%); Michigan (13.9%); Minnesota (10.1%); Missouri (11.3%); Nebraska (11.7%); New Hampshire (12.2%); New Mexico (10.5%); North Carolina (13.9%); Ohio (13.7%); Washington (14.3%); and Wyoming (10.5%).

WALL STREET POLICE BLOTTER

Todd Geiger, former El Paso Corporation vice president, was indicted on charges of reporting bogus natural-gas trades to allegedly manipulate price indices, as part of an expanding criminal probe of false transactions used by energy trading companies to inflate revenue. A Federal grand jury in Houston charged Geiger with wire fraud and filing a false commodity report, accusing him of fabricating 48 bogus trades and providing the information in November 2001 to Inside FERC (Federal Energy Regulatory Commission) Gas Market Report, a newsletter that compiles price indices used in supply contracts. Geiger was the head of El Paso's Canadian natural-gas trading desk.

If convicted, Geiger faces up to five years in prison and a $500,000 fine on the charge of false reporting; and a maximum of five years in prison and a $250,000 fine on the wire fraud charge.

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