Last week, the New York City hotel workers union announced a stunning 7-year contract with the Big Apple's hotel industry providing for wage increases averaging 27 percent. The contract is due to be ratified by the membership Monday. The City's hotel trades council, whose master contract covers nearly every large hotel in Manhattan, already has the industry's best wages and health benefits. Room-attendants earn over $50,000 a year, and their earnings will go to $60,000. Everyone in the local makes a middle class income.

How on earth did the union achieve that? Through relentless organizing, professionalism, and development of the rank and file into a vigilant force that protects worker rights.

The higher wages will not increase room costs, because hotels are already charging whatever the market will bear. A higher share of these earnings will go to wages rather than profits.

After the Strauss-Kahn affair, where the union successfully demanded panic buttons for workers, I wrote a long profile of what has to be America's most effective union local for The American Prospect.

In it, I asked two questions: Are New York hotel workers unique? And what will it take for other workers in the service sector to do as well?

The issue of stagnant worker wages is, after all, the great economic question of our time. The conventional wisdom holds that there is not much our nation can do about it. Foreign competition from lower-wage economies has battered down wages in manufacturing. Many service sector jobs require only modest skills, and offer modest earnings to match.

The best that much of the economics profession can offer is to commend more education — at a time when millions of young people with college degrees are having to settle for jobs that only require a high school diploma. The trend is for an over-educated, under-compensated workforce.

The hard rightwing explicitly places the blame on workers. Charles Murray, the conservative pamphleteer whose 1984 book, Losing Ground, blamed deteriorating economic conditions for blacks on the welfare state, has now shifted ground in a new, much-remarked book, Coming Apart. For Murray, the further decline in working class earnings is now all about deteriorating values.

Rightwing commentators are euphoric. They now have a handy scapegoat for the worsening economic conditions of American workers — the workers themselves.

You could have fooled me. The same diligent workers who earned decent wages a couple of generations ago are now working just as hard for a lot less. Workers are better educated than ever. Something has sure changed, but it isn't the work ethic.

Note also the sleight of hand. In his 1984 book, Murray contended that the killer was incentives that rewarded idleness over work. Congress and President Clinton duly took note. AFDC was repealed, incentives were shifted to reward work — and the decline in wages just continued. Apparently, incentives were not the problem. Murray, despite the attention, is Losing Ground. The main thing that's Coming Apart is his logic.

The fact is, American productivity has nearly doubled in a generation. The problem is that the fruits of that productivity have gone to the wrong people. Money that might have gone to wage-earners has gone to the top one percent, and to the top one-hundredth of one percent.

It is hard to swallow the idea that today's one percent has higher skills and somehow earned these astronomical rewards. After all, this is the gang whose speculations just crashed the economy. How skilled is that?

The middle of the economy — factory workers, nurses, technicians, even retail clerks — work with much more advanced technology than a generation ago. But their wages have lagged. Take a good look at the clerk at the photo counter of your local drugstore, and the technological marvel that she's learned to operate. She's lucky to make nine bucks an hour.

So the question — the most important economic question of our era — is how do we make sure that more of society's total product goes to ordinary workers and not so much of it to the one percent?

Better education helps, but it is no silver bullet. In the 1950s, most of the blue collar middle class hadn't even graduated high school, but working people got a much larger share of the total national product.

There are only four ways to do it. We can allocate more of the total product socially, by taxing the best off and using the proceeds to finance expenditures that provide a higher living standard for all. Places like Germany and Canada do that. It doesn't seem to hurt their productivity at all. On the contrary, a more secure population makes for a more reliable workforce.

We can use regulations to make it a little harder for the super-rich to rig the economy in their favor — for instance banking regulations that prohibit getting filthy rich via ruinous speculation.

We can condition foreign trade on decent social standards, so that we don't import the wretched wages and working conditions along with the produces.

Or we can raise wages directly, through institutions like strong unions.

In this regard, Sunday's New York Times has a remarkably misleading, if encyclopedic, piece on America's safety net. In it, the authors find it surprising and alarming that more of our social outlay is going to the middle class, as opposed to the poor.

Authors Binyamin Applebaum and Robert Gebeloff write, "The government safety net was created to keep Americans from abject poverty, but the poorest Americans no longer receive a majority of government benefits." And they use the case of a Tea Party member, Ki Gulbranson, who makes about $39,000 who benefits from the Earned Income Tax Credit and whose mother gets surgery courtesy of Medicare to show the inconsistency of critics of government.

Nice touch — but the safety net was never just for the poor. Programs like Social Security, Medicare, not to mention free public education, were intended for the whole population. The whole point of the Earned Income Tax Credit is to keep people out of poverty. The fact that a great many of its recipients manage to stay (barely) middle class, like the Tea Party member, is an emblem of its success.

The piece is also unhelpful because it contributes to the mythology of an "entitlement crisis."

The fact is that nations like Canada and Germany spend more of their entire product socially. They have less poverty and a more secure middle class. They also have higher prevailing wages. We can afford more generous social outlays without deficits if we just resolve to pay for them.

Which brings me to the punch line. Programs of social outlay can help build a more just and secure society, but most income is still wage and salary income. And if wages keep declining, social transfer programs will keep swimming upstream.

That in turn brings us back to the New York hotel workers union. It may be a bit easier to organize a strong union in the New York hotel industry because New York is a tourist destination and the New York Hilton is unlikely to move to Bangladesh in search of lower wages.

That said, there are lots of cities in the U.S. that are also tourist destinations that have weak hotel locals and lousy wages. If workers can build a strong union in the New York hospitality industry, they can do it in the rest of the service sector — if the government just enforces the law that empowers workers to choose a union. The war against unions by Republican governors is a war on behalf of the one percent.

So don't let anyone tell you that some fateful structural change has made it impossible for working people to get decent earnings. America, on average, is richer than ever. The trouble is that too much of the total pie is going to the wrong people.

This is an enduring struggle, which will require us to use every bit of available leverage.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is "A Presidency in Peril".

President Obama is exceptionally lucky when it comes to the weaknesses of the Republican field and its stunning penchant for mutually assured destruction. Who would have expected, for instance, that Newt Gingrich's billionaire-backed super-PAC, aiming to destroy front-runner Mitt Romney, would produce a documentary advertisement on private equity slightly to the left of what we might have expected of Michael Moore? Or that Gingrich, reprimanded by leading free-market ideologues, would then request that the ad be pulled? In this hilariously bungled caper, Marx meets the Marx Brothers.

But it remains to be seen whether Obama will be as lucky when it comes to the shape of the economy as the election year unfolds. Some of what will occur this year is partly within the president's control; much is not.

Consider the several vulnerabilities of the still fragile recovery:

The Jobs Mirage. Democrats were cheered and Republicans caught off guard when the Labor Department's December jobs numbers showed a net increase of 200,000 jobs — a nice improvement over previous months. However, a closer look showed that some 42,000 of these were seasonal courier jobs — all the people hired to deliver holiday gifts purchased via Amazon and other online vendors.

Jared Bernstein, the former senior Administration economic advisor now at the Center on Budget and Policy Priorities, calculates that the 200,000 jobs number should be deflated by about 30,000. This brings it closer in line with other recent months, and suggests that the economy is still a ways from a strong recovery.

The biggest problem retarding a strong recovery is that wages are lagging far behind the economy's productivity growth. Recent Federal Reserve statistics show that consumers increased their borrowing to finance their holiday spending, but that can't last unless wages begin following.

Stronger economic stimulus is beyond the control of the administration, given the Republican strategy of wall-to-wall legislative roadblocks. The one thing that Obama could do that he isn't doing is a more aggressive stance on relief for underwater homeowners. With housing prices still falling in nearly every metropolitan area, the housing sector is still depressing the overall economy.

Euro-Drag. From the perspective of Obama's re-election, probably the best case for the Euro this year is that the leaders of the EU keep kicking the can down the road and keep the currency from collapsing. But that may not be good enough. (As the Financial Times' Martin Wolf puts it, the can is filled with gasoline.)

Even if the Euro holds together, the price Europe's financial elites have extracted for keeping weaker European economies afloat is prolonged austerity. That not only depresses Europe's prosperity but weakens U.S. export markets.

Treasury Secretary Tim Geithner's European diplomacy has been directed at one goal: The European Central Bank should behave more like the U.S. Federal Reserve and flood European credit markets with cheap money. But the ECB, responsible to austerity-minded political leaders, is only going part of the way. The S&P's downgrading of the sovereign debt of nine nations that use the Euro only pours oil on the flames.

For the most part, Europe's self-inflicted financial folly is beyond the reach of the Obama Administration. But it could sink the U.S. recovery and Obama's prospects.

The Oil Slick. Iran's continued nuclear program is among the most vexing of foreign policy challenges. The West has had some success in keeping Iranian oil off world markets. The Iranians, in turn, have threatened to block the shipping lanes of the crucial Straits of Hormuz, a 19-mile-wide shipping lane through which about one-fifth of the world's oil supply passes. Reportedly, the Obama administration has told the Iranians that this could be considered crossing a red line, close to an act of war, and that closure of the strait would be met by military force.

But this game of geo-political chicken also has grave consequences for the price of oil. Even if shipping lanes stay open, oil supply could come under pressure. The price of oil has stayed well-behaved, ironically enough, because the weak recovery has depressed demand. But a spike in the price of oil could be a spike in the heart of economic growth.

According to standard political-science analysis of presidential re-election chances, the most important single factor is the state of the economy in the presidential year. This means not just the absolute unemployment and economic growth numbers, but whether voters feel things are improving.

Yale's Ray Fair, whose economic model has been uncannily accurate in predicting presidential winners, surprised many observers last November, when he projected a narrow Obama win based largely on improved economic growth in 2012. But Fair's economic projections now look quite optimistic.

Bottom line: It is hard to recall a presidential year when there were so many economic wild cards, any one of which could tip the election's outcome. On the other hand, it is hard to recall a weaker or more bizarre Republican presidential field. Which will prove decisive?

Despite what is likely to be a mediocre economic picture at best, and the demonizing of Obama by his opponents, and the disappointment in this president on the part of many of his most fervent 2008 supporters, by next November Obama may yet strike a plurality of voters as the safer and saner of the candidates. But any number of imponderables could upset that calculus.

Robert Kuttner is co-editor of The American Prospect and a Senior Fellow at Demos. His latest book is A Presidency in Peril.

A well-funded, faux-reformist group known as Americans Elect is promoting a third party presidential candidacy and anticipates qualifying its candidate to be on the ballot in nearly all states. It is doing this by collecting millions of petition signatures, over 2.2 million so far, taking advantage of voter frustration with political blockage in Washington. The actual candidate will be decided later, by Internet Convention.

Despite the superficial populism, just about everything about this exercise is misguided.

For starters, consider the premise that sensible centrism starts with budget balance. The storyline is that the obstacle to economic recovery is the budget deficit, prevented by partisan extremism. If only the left would agree to cutting social programs like Social Security and the right would accept raising taxes, fiscal responsibility and recovery would ensue.

But fiscal tightening during a deep slump would retard the recovery. The centrists get the cause and effect backwards. The recession caused the deficit, not vice versa.

Cut the deficit while the economy is still shaky, and you abort a fragile recovery. If anything, the economy needs a lot more public investment to jump start job creation and put income in workers' pockets. The last thing it needs is high-minded austerity.

Social Security is in fine shape for decades, and Medicare reform needs to be part of broader healthcare reform, meaning national health insurance. Social insurance has little to do with the the current or near-term deficit. As for the rest of federal domestic spending, it's already at its lowest share of GDP since the Eisenhower years.

You can see the allure of the wrong kind of post-partisan centrism in Democratic Senator Ron Wyden's entirely misguided alliance with Republican Representative Paul Ryan to convert Medicare into a voucher after 2022. If the voucher doesn't pay for decent insurance, the elderly are on their own. Voucherization of Medicare takes us further away from real reform.

The quest for a centrist third party alternative also misstates why Washington is blocked. The storyline is one of symmetrical extremism and refusal to compromise on the part of Republicans and Democrats alike. Says Americans Elect's website, "you have the power to help break gridlock and change politics as usual. No special interest. No agendas. Country before party."

But, as anyone who hasn't spent the last three decades on Jupiter must know, Democrats have spent the era since Jimmy Carter moving to the middle of the spectrum on a broad range of pocketbook and national security issues. Only on tolerance issues has the presidential party remained progressive.

So we already have a centrist party. It's called the presidential Democratic Party.

President Obama kept splitting the difference with Republicans, and then splitting the difference again, and had to almost be bodily restrained by such Bolsheviks as Sen. Harry Reid lest Obama give away the store on Medicare and Social Security.

Republicans during this period have both moved further to the right ideologically, and have become more obstructionist tactically. They have refused to pass routine legislation such as extension of national debt authority. Ordinary bills are now subjected to Senate filibusters. If they don't like a federal agency like the consumer financial protection bureau or the National Labor Relations Board, they won't confirm its nominees. If they don't like duly enacted legislation like the Affordable Care Act, they vow to destroy it. The Supreme Court has become a partisan organ.

This pattern of extremist obstruction by a major party is something unknown in American politics since the pre-Civil War battles over slavery.

So anybody who blames both parties equally for the government's failure to address urgent national needs is simply delusional. This unfortunately includes the New York Times' Tom Friedman, who thinks Americans Elect is an idea whose time has come. It includes center-right Democrats such as Will Marshall of the Progressive Policy Institute and center-right Republicans such as Mark McKinnon, late of the Bush Administration.

These worthies somehow believe that if the next president is even more center-right on economic issues than those dangerous radicals like Tim Geithner, Republicans in Congress will somehow relent and learn the art of compromise.

The thing is funded mostly by hedge fund gazillionaires. In fact, the chief operating officer of Americans Elect, Elliot L. Ackerman, got a $30 million dollar gift from his father, Wall Streeter Peter Ackerman, to finance this exercise in Internet populism. Thanks, Dad.

As my colleague Paul Starr has observed, sometimes self-described moderates can also be zealous and dangerous fanatics.

With Americans Elect creating a placeholder slot on the 2012 presidential ballot in most states, a critical election gets yet another wild card. If someone like Ron Paul or Donald Trump decides to make a go of it, then the third party will siphon mostly Republican votes and help re-elect Obama. If Michael Bloomberg gets the itch, he will likely siphon off more socially liberal independent votes that would otherwise go to Barack Obama, and help the Republican win. And in this age of televised political celebrity, there is even an outside chance that the latest celebrity flavor of the day could be elected. Trump as the ultimate political survivor; Bloomberg finds another office to buy.

Note that this hedge-fund-spawned third party is most likely to attract self-financing billionaires. This is one hell of an exercise in the people taking back their politics.

In a momentous election year, we are very likely to see two parallel political campaigns. In the main arena, Barack Obama, the Democrat, will duke it out with Newt Gingrich or Mitt Romney.

But there will also be a shadow arena, in which Republican operatives try to make sure that the third party nomination goes to a quasi-Democrat, the better to draw off Democratic votes; and Democratic operatives try to do the opposite.

So we have wrongheaded ideology, married to a misguided diagnosis of what ails America, yoked to a perverse politics. Just about what you'd expect of hedge-fund billionaires meddling in electoral reform.

Robert Kuttner is co-Editor of The American and a senior fellow at Demos. His latest book is A Presidency in Peril. This article was originally published by The Huffington Post.

In January 2010, after Scott Brown's upset victory in the special Massachusetts Senate election, a panicky President Obama managed to sound like a populist for a couple of days. He called for a tax on banking profits and drafted Paul Volcker to appear at a quickie press conference so that the administration could call for something dubbed "The Volcker Rule."

Volcker, an impeccably conservative former Fed Chair skeptical about the abuses of financial de-regulation, was one of the few elder statesmen in 2010 with any credibility. Though Volcker was an early supporter of Obama and adviser to the campaign, Treasury Secretary Tim Geithner and economic adviser Larry Summers managed to marginalize Volcker because the old man turned out to be leery of their schemes to prop up the big banks without cleaning them out. Even worse, Volcker was nostalgic about the 1933 Glass-Steagall Act, which had staved off big trouble for more than half a century by requiring that federally insured commercial banks stay out of the inherently speculative investment banking business.

Financial lobbies had finally succeeded in getting Glass-Steagall repealed in 1999, with Summers and Geithner cheering. Now the president, in big political trouble, was sending for Volcker the way one breaks glass in an emergency. But the so-called Volcker Rule, a phrase the White House made up, turned out to be Glass-Steagall lite. Unlike the 1933 statute, Obama's so-called Volcker rule did not separate commercial banks from investment banks — a nice clear bright line that was easy to police and hard to evade.

Rather, the administration's proposed Volcker Rule limited how much "proprietary trading" big consolidated banks could do. Trading, however, is only one of the many kinds of mischief bankers get into when the mix commercial banking and investment banking. The version of the rule that was included in the Dodd-Frank Act left details to the regulators.

Now the regulators have produced a 298-page set of proposed rules, and nobody is happy. The regulators have invited comment on no fewer than 350 questions. Bankers say the whole thing is too bureaucratic and will cut into their profitable lines of business. Consumer groups warn that the thing has too many loopholes. Wiseguys on Wall Street say it is child's play to disguise a proprietary trade for the bank's own account as a customer trade.

All, of course, are correct. It would have been far better policy to return to the simple bright line of the Glass-Steagall Act.

If you want to be a commercial bank, with federal deposit insurance, access to Federal Reserve advances, and a Good Housekeeping seal from regulators, great. You will have to follow closely policed rules. Alternatively, if you want to trade and speculate with your own money, go to it. But don't grow so big that you can bring down the whole system, stay out of the commercial lending business, and don't expect the government to bail out your bad bets.

That system worked very nicely. It was almost impossible to evade, and it didn't require 298-page regulations, with legions of regulators to police the creative evasions and gray areas.

The entire banking system has become far too complex — too complex for economic efficiency and too complex to regulate. Over at the Commodity Futures Trading Commission, they are having a hard time deciding how to carry out the Dodd Frank Act's provisions on derivatives. And the Federal Deposit Insurance Corporation has just issued the first draft of government regulations on how to proceed when a "systemically significant" large bank gets into trouble. This is also full of gray areas.

But most of the complex financial instruments invented in the last two decades do not add to economic efficiency. They only add to risk, and to the outsized profits of insiders.
Investors and borrowers did just fine before credit default swaps (CDS) were invented in the 1990s. CDS mainly added to the system's leverage, opportunities for reckless gambling, and potential for collapse.

Let's face it: There will never be enough regulations and regulators to police all of the gray areas in a system this complicated. The best remedy is drastic simplification. We need a simpler banking system, and clearer and more straightforward laws like the Glass-Steagall Act. The Obama administration proposed an ambiguous "Volcker Rule" rather than a clean return to Glass-Steagall because the so called rule would be easy to evade and would not interfere in any fundamental way with Wall Street's current business model.

It was Henry David Thoreau who observed, "Our life is frittered away by detail… simplify, simplify." He could have been speaking of the financial collapse and the hapless, half-baked remedies. So forget the Volcker Rule. When it comes to banking, we need a Thoreau Rule.

Robert Kuttner is co-editor of The American Prospect and a Senior Fellow at Demos. His latest book is A Presidency in Peril.

This article was originally published on The Huffington Post, where you can read the original and comment.

Robert Kuttner is the author of A Presidency in Peril.

"There go my people. I must find out where they are going so I can lead them." –Alexandre Auguste Ledru-Rollin, French politician (1807-1874).

When elected leaders largely ignore a disgrace like the financial collapse of 2008, sooner or later popular protest fills the vacuum. The Wall Street protests are heartening — but also a measure of the utter failure of the usual machinery of democracy to remedy the worst pillaging of regular Americans by financial elites since the 1920s.

For three years, we have been wondering, where is the outrage? For a time, it was co-opted by the Tea Parties — a faux populism, attacking government, financed by billionaires, delivering nothing to the 99 percent of Americans not represented by Wall Street. Now authentic protest directed against the real villains is finally here.

The ingenuity of occupywallst.org, its spread to other cities, its blending of internet-organizing with on-the-ground protest, is inspiring. The New York protests, in which more than 700 people were arrested over the weekend, are likely to draw more activists, especially if police keep bungling the choreography of peaceful protest and deliberately leading demonstrators into traps.

But sooner or later, protest will need to turn to politics.

And God knows, we missed the rendezvous we were supposed to have with democratic politics in January 2009. With a newly-elected president who inspired great hope for change, politics failed us in that first phase of the crisis. Barack Obama installed a Wall Street-friendly team that resisted fundamental changes in the financial model that caused the collapse and the deep recession that followed.

The 2010 Dodd-Frank Act, despite heroic efforts by progressives, stopped just short of separating financial speculation from ordinary banking. Most of its pro-consumer measures were added by relatively junior legislators over the objection of the Federal Reserve and the Treasury. The law's strong provisions are being relentlessly gutted by a combination of industry lobbying, Republican obstruction, and lack of enthusiasm for tough regulation from Tim Geithner's Treasury Department.

The depth of the continuing recession can be traced back to the failure to radically reform the banks in the spring of 2009. Interest rates today are at record lows, but Wall Street banks still make their money from merger deals, complex securitization packages, and trading for their own accounts, while community banks are too traumatized to make loans to any but blue-chip customers.

Meanwhile, nobody has gone to prison for the systematic frauds that brought down the economy, consumers are getting gouged by new fees that the banks dream up to compensate for their own losses. And the mortgage foreclosure crisis continues to fester and drag down the rest of the economy.

So the Wall Street protestors have plenty to be angry about. But what kind of reform will the system deliver?

In many ways, these demonstrations have a lot in common with events around the globe, from the protests that toppled dictators in Egypt and Libya to the spontaneous street protests in Tel Aviv, Madrid, and Athens. In every case, protest was organized outside regular political channels, because politics as usual wasn't delivering. New people were drawn in, rightly skeptical of the system's capacity to deliver real change.

As a sixties kid, I can't help comparing today's situation with the two great causes of that tumultuous decade — ending the Vietnam War and delivering civil rights. In that era, reform was also blocked by mainstream politics.

In the case of the antiwar protests, radicals led, liberals came later, and Congress came even later (with the exception of a few early heroes like Senators Wayne Morse of Oregon and Ernest Gruening of Alaska).

In the civil rights movement, freedom rides, sit-ins, civil disobedience, the deaths of voter-registration workers — all these acts of heroism only bore fruit when protest achieved its rendezvous with politics, weirdly enough via the same President Lyndon Johnson who was prosecuting the same calamitous Vietnam war that led to his own downfall.

In each case, it took several years for street protest to produce durable reform. These two great protests had happy endings (or beginnings), with great pain along the way. But history doesn't guarantee happy endings.

As Wall Street has finally engendered the kind of outrage that it so thoroughly deserves, democratically-elected officials are still light years away from embracing the kinds of drastic reforms that the system so desperately needs.

In a democracy, once grassroots protest takes off, you never know what course it will take. Nobody at the time of the early sit-ins and freedom rides could have predicted three great civil rights acts within less than a decade.

Bankers have immense power, until public opinion turns decisively against them and democratically-elected leaders decide to lead. These protests were a long time coming; I fear that it will take far longer for the system to deliver the drastic reforms that we need.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril. This article was reposted from his Huffington Post blog.

If President Obama's health reform, the Affordable Care Act, backfires politically, one reason will be the staggering political power of the drug industry. If, for example, the health reform had used the bargaining power of the federal government to lower the cost of prescription drugs bought by Medicare and Medicaid, instead of the current system in which the government pays sticker price, there would have been far less need to find savings in Medicare and far less political backlash among voters.

But there would have been a huge political backlash on the part of the drug industry, whose benign neutrality the administration sought and got. So bulk purchase of drugs at negotiated prices was a non-starter politically.

The drug industry has also very substantially captured the Food and Drug Administration, which is far too quick to approve new, "me-too" drugs of dubious clinical value and far too slow to remove dangerous or ineffective drugs from the market or at least condition them with clear limitations and warnings. The Obama FDA is only marginally better on this front than George W. Bush's.

If you want to get a sense of just how damaging the drug industry is, you need to read Dr. Marcia Angell's blockbuster two-part article in the June 23 and July 14 New York Review of Books. Here is the punch line of part one, "The Epidemic of Mental Illness: Why?" The current generation of anti-depressant drugs, which change the way the brain absorbs a neurotransmitter called serotonin, are probably no more effective than placebos.

Yet these widely prescribed and hugely profitable drugs produce major changes in brain chemistry, are often difficult to kick, and patients can find themselves on a whole cocktail of drugs to counteract each other's effects. As Angell writes: in positing that depression was caused by too little serotonin, "instead of a developing a drug to treat an abnormality, an abnormality was postulated to fit a drug." As she adds, "Or similarly, one could argue that fevers are caused by too little aspirin."

Angell draws on three books, most notably, The Emperor's New Drugs, by Irving Kirsch. As Angell explains the system, a drug company may submit any number of clinical trials to the FDA in seeking approval for a new drug. No matter how many trials prove duds, as long the drug maker can produce two trials that show some clinically significant difference between the drug and the placebo, it generally gets the drug approved. This is rather like a student doing over exams until the right answer pops up.

Studies that show benefit are of course published and publicized. Studies that show no benefit are kept quiet. But the duds remain on file with the FDA. So Kirsch used a freedom of information request to review all of the trials that drug makers had submitted. He found that the vast majority of 42 clinical trials submitted to the FDA between 1987 and 1999 for such best selling selective serotonin reuptake inhibitor drugs as Prozac, Paxil, Zoloft, Celexa, Serzone, and Effexor, showed no improvement compare to placebos. And if you averaged all the studies, the improvement was marginal.

But then Kirsch adds another twist. Since anti-depressant drugs generally have side effects, patients often guess correctly whether they are receiving the placebo or the drug because of the presence or absence of side-effects. That, of course, ruins the "double blind" nature of the clinical trial, in which no subject is supposed to know whether they are getting the drug or a placebo.

But in some trials, according to Kirsch, scientists use "active" placebos that include a harmless drug that produces a side effect such as a dry mouth. That way, both the group receiving the drug and the group receiving the placebo believe that they are getting the drug. Guess what? In trials using an active placebo, with "side effects," there was no difference between the patient response to the drug and to the placebo.

Angell argues that much of the huge increase in reported mental illness is the result of the development and marketing of drugs.

In part two of her piece, citing another recent book, Unhinged, by Daniel Carlat, Angell observes that psychiatrists consistently take more money from the drug industry than any other medical specialty. Psychiatry, working in tandem with the drug industry, keeps inventing new diagnoses for which new drugs are needed. Or perhaps it's vice versa. In the research work for DSM-V, Angell reports, fully 56 percent of the members of working groups disclosed significant industry interests.

My friend Dean Baker has long argued that if all pharmaceutical research were publicly financed and placed in the public domain, conflicts of interest would be wiped out, research would be guided by medical need rather than profit, and taxpayers could actually save money because more than half of all drugs are now purchased (at patent-protected prices) by Medicare, Medicaid, the VA, or some state agency.

Under that system, scientists could then go back to doing science, rather than trying to cash in as handmaidens of the drug industry.

Dr Jonas Salk, who created the polio vaccine, was asked in a TV interview whether he planned to patent his discovery. He responded, "The people own the patent on this vaccine. There is no patent. Could you patent the sun?"

Today, industry is patenting, if not the sun, applications of solar energy, and the drug industry is patenting folk medicines long used by indigenous peoples. Corrosion of the public spirit of scientists and the distortion of scientific inquiry is one of the many costs of this pervasive commercialization. Not to mention the creation of bogus illnesses that require bogus drugs with little medical benefit but real side effects.

That's truly depressing.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency in Peril.

After every financial debacle or war, there is a huge political struggle over whether creditors and financial speculators get to stand in the way of an economic recovery. When the creditors win, ordinary people who had nothing to do with the crisis are typically the victims. Today, the entire political elite is in the austerity camp, and those who argue that creditors should take some losses so that the rest of the economy can grow are mostly ignored.

This is the common theme to the issue of mortgage relief to spare American homeowners millions of foreclosures, the question of whether the US should sacrifice Medicare and Social Security on the altar of deficit reduction, and the punishment being visited upon small European economies such as Greece, Portugal and Ireland.

(Though Dominique Strauss-Kahn was evidently a sexual predator, he was not a financial rapist when it came to vulnerable nations. He was a rare member of the ruling financial club who gave some attention to economic recovery over austerity.)

Greece is the poster child for this dilemma, and the Greek story reveals the real villain of the piece — the big banks. In February 2010, it was revealed that Goldman Sachs had been complicit in allowing previous Greek governments to cook their books and hide the size of the Greek deficit by creating a special kind of currency swap that was really a disguised loan.

In the aftermath of the financial crisis, Greece's national debt is unsustainable, and only credits from the European Central Bank and the International Monetary Fund are keeping Greece from defaulting.

The bankers want Greece to languish in debtor's prison, cutting wages and social benefits, increasing taxes, and otherwise sandbagging its own economy in order to pay back creditors at 100 cents on the Euro. Greece, however, is now in a vicious circle: the more the Greeks practice the austerity demanded by the money markets and the European Central Bank, the more the Greek economy predictably slumps and the more that money markets lose confidence that Greece will ever recover enough to pay back its bondholders.

In this crisis, bankers are culpable in three different and reinforcing respects. First, we have the case of Goldman's complicity in helping the Greek previous government to get Greece in over its head. Secondly, the European Central Bank and the big German banks are opposed to a restructuring of the Greek debt — trading short term bonds for longer term securities with reduced interest and principal — because big banks are the major bondholders and resist taking any losses.

Recently, a third concern came to light — our old nemesis, credit default swaps (CDS). These are the very same toxic securities that were so implicated in the 2007-2009 financial crash. CDS are a form of insurance against default of securities. But unlike, say, underwriters of life insurance or fire insurance, the issuers of swaps seldom have adequate reserves against losses because they assume that defaults will hardly ever occur. Rather, CDS have become a favorite vehicle for speculation by hedge funds and investment banks.

According a Friday Wall Street Journal report from Brussels, even a partial a restructuring of the Greek government debt could trigger payouts of credit default swaps. A group of European finance ministers raised the possibility of a "soft" restructuring of the Greek debt, so as not to reward speculators who were betting on a Greek default, but officials of the European Central Bank threw a fit, warning that the ECB would pull the plug on funding for Greek banks if such a restructuring were discussed.

From the view of the ECB, the sheer complexity of financial markets is now such that any form of restructuring that would benefit Greece could set off ripples that might destabilize the system, so the ECB is dead set against it. Better for the Greeks just to suffer.

It's clear that Greece can't pay its debts. The practical question is whether an adjustment will be accompanied by more pain or less, and whether the financial sector will be permitted to keep bleeding Greece dry.

There is an instructive historical parallel. When American banks found themselves in big trouble in the 1980s because several third world countries could not pay back their loans, Nicholas Brady, Bush I's Treasury Secretary, came up with an ingenious plan. The debts would be stretched out, and the creditors would take a hit averaging about 30 percent.

The banks were compelled to take their feet off the oxygen hoses of more than a dozen nations, and recovery of their real economies ensued. Worry about triggering payouts of credit default swaps was not an obstacle because, mercifully, credit default swaps had not been invented yet.

The more we learn about these toxic securities and their abuse, the more wisdom we see in Paul Volcker's comment that the last useful innovation created by the financial industry was the ATM machine.

The stakes are somehow clearer after wars than after financial busts. Bonds issued by defeated countries are worthless, so debts do not sandbag recoveries. Victorious countries typically restructure their own war debt, so that it doesn't cripple the postwar economy. (America's first treasury secretary, Alexander Hamilton, was a hero for devising a plan for the new federal government to assume the war debts.)

We also remember the fatal lesson of the First World War, where the British and French tried to squeeze defeated Germany dry to pay off their own war debts — and destroyed Germany's economy, thus creating grievances that led to World War II. After the second war, we didn't make the same mistake twice.

But somehow, it's harder to win general support for debt relief after a financial collapse because details are more murky and the banks are so bloody powerful. The fact is that throughout modern history, governments have defaulted on debts dozens of times. It's more important for real economies to realize their productive potential than for bankers to get their pound of flesh.

The choice doesn't have to be default or debtor's prison. A middle ground is debt restructuring of the sort being proposed for Greece, but the banks and their toadies in government are too greedy and short sighted to appreciate it.

In the context of today's debt politics, Nick Brady, who faithfully served George H.W. Bush, is a dangerous radical.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency in Peril.

Paris — The apparent self-destruction of Dominique Strauss-Kahn in a New York hotel is emblematic of a European left that has ceased to be much of a progressive alternative, either in terms of lifestyle or policy alternatives. Strauss-Kahn, who until yesterday headed the International Monetary Fund, was the Socialist front-runner to challenge French President Nicolas Sarkozy next year. Polls showed that Strauss-Kahn well ahead of both Sarkozy and far right populist Marine Le Pen.

But even before this latest scandal broke, Strauss-Kahn didn't seem like much of a socialist. Last week, the press caught DSK, as the local press calls him, and his wife tooling around in a borrowed $150,000 Porsche, which reinforced his image as wealthy playboy. In 2008, Strauss-Kahn barely survived a widely publicized affair with one of his IMF employees, and in the wake of the New York incident, another woman has stepped forward claiming a rape in 2002.

Cynics here have argued that the wily Sarkozy promoted his likely rival for the IMF post to increase the chances that the imperious Strauss-Kahn would commit some highly visible and politically fatal act. For demolishing the Socialists' claim to speak for the common Frenchman and woman, it's hard to beat an accusation of the entitled Socialist standard bearer orally raping a chambermaid in a $3,000 luxury hotel room and then trying to skip town.

The last successful French socialist president, the dignified Francois Mitterrand, was known as la force tranquille (the quiet strength.) After the Porsche photos surfaced, Strauss-Kahn was instantly dubbed la Porsche tranquille. Mitterrand did not have a lavish lifestyle. He did discretely keep a mistress. They had a daughter together, whom Mitterrand acknowledged and faithfully visited. Among French leaders, this passes for personal probity.

French voters are increasingly sick of Sarkozy, whose cheesy behavior and deep cuts in French social benefits have led to a search for alternatives. But even before this episode, Strauss-Kahn looked like nothing so much as a faux-left version of Sarkozy. The latest outrage leaves voters to feel that elites, regardless of professed party identity, serve mainly themselves, their own megalomania, tawdry materialism and sense of invulnerability.

The larger casualties of this mess include the French Socialist Party, a more progressive IMF, and the credibility of public officials and institutions in general.

For all his personal flaws, Strauss-Kahn, in his current job as head of the International Monetary Fund, has been less of an austerity-monger than most of his predecessors. That's a pretty low bar, but under Strauss-Kahn and his chief economist, Olivier Blanchard, the IMF has uncharacteristically weighed in on the side of not punishing nations with large deficits, but helping them to grow their way out of recession.

With Strauss-Kahn sidelined and probably finished, the IMF has appointed an American, John Lipsky, a career official, as acting managing director. Strauss-Kahn, as a French Socialist, had been leaning against the IMF austerity culture, and Lipsky is considered more orthodox.

The impact on the Socialist Party is also considered grim, but perhaps that's premature. Two of Strauss-Kahn's rivals for the nomination are themselves a former couple, ex party leader Francois Hollande and former presidential nominee Segolene Royal, who lost the election to Sarkozy in 2007. A third is Martine Aubry, the current party leader, who had dropped out of the race in favor of Strauss-Kahn but may now re-enter. Some of the French socialists whom I interviewed said that the erratic and arrogant Strauss-Kahn was a political time bomb, and that Hollande or Aubry had a better shot at beating Sarkozy. But this was hardly a good day for the French Socialist Party.

The pity is that the French electorate remains left of center. France has dozens of effective socialist mayors. When political preferences are de-linked from the flawed personalities of national leaders, the French electorate is more likely to support the left. But the combination of weak and squabbling Socialist party chiefs, the fragmentation of the French left into Socialists, Greens, and the further left Front de Gauche, and the quirks in the French electoral system which requires a runoff if no candidate gains a majority, the final two candidates next year could well be the far-right Marine Le Pen versus Sarkozy as the moderate.

Strauss-Kahn's reckless and grandiose personal behavior is symptomatic of a deeper sickness afflicting the European left. It isn't just that people like Strauss Kahn flaunt their wealth, but that they share the financial outlook of the wealthy.

The world suffered a financial collapse in 2008 because deregulation had allowed the banking system to crash the economy. So-called "center-left" parties were complicit in this deregulation, whether under Bill Clinton in the United States, Gerhardt Schroeder in Germany, or Tony Blair in the UK. In France, Mitterrand began as a left-socialist and ended as more of a neo-liberal.

It's small wonder that confused voters, looking for alternatives to the party of collapse and austerity, are skeptical of social democrats. In a world where national leaders have all the dignity and character of a Sarkozy or a Berlusconi, it would be splendid of the left stood for something better. But politics in general seems a mix of high life and lowlife, regardless of party, while daily existence for regular people becomes more of a trial.

In much of Europe, the left doesn't offer a persuasive opposition strategy or program.

(An exception is Denmark, where the social democrats are favored to win the year's election, which would make the dynamic Helle Thorning-Schmidt Denmark's first woman prime minister.)

But for the most part, an ideological failure to stand clearly for something different tends to produce unconvincing leaders.

You still see Obama bumper stickers in Paris, where the U.S. president remains highly popular. Barack Obama not only still stands for hope, but he represents a striking contrast to both Sarkozy and Strauss-Kahn in his irreproachable personal behavior. But with the world still in financial crisis, that's also a low bar. By itself, personal rectitude does little to rally public support of to solve deep national ills.

I suppose we Americans can take pride that our president has never been accused of assaulting a chamber maid in a luxury hotel. Now, if he would just assault the financial barons.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency in Peril.

The economy added 244,000 jobs in April. That should be good news for President Obama and the Democrats. But according to the Economic Policy Institute, at this rate of job growth it would take until the fall of 2016 for unemployment to come back down to where it was before the recession. The next election, unfortunately, is in 2012.

Among the not-so-great items in the Labor Department's report:

• Fourteen million people are still officially unemployed, and millions more have given up looking for work.
• Counting those out of the labor force or working part time but wanting full time jobs, the total number of unemployed or underemployed was just under 25 million — not significantly better than at the pit of the recession. The number of people with involuntary part time work actually rose by 167,000 in April.
• Among young workers, 24 or younger, the jobless rate was a sickening 17.6 percent. And among African Americans, 16.1 percent were out of work. These happen to be two groups who voted with great enthusiasm for the president in 2008.
• Despite the growth in employment, the overall percentage of Americans in the labor force did not increase. The workforce is still more than a million people smaller than it was a year ago — meaning that the economy will need to grow at a much faster rate to soak up the unemployed.
• There still 5.8 million workers who have been jobless for more than six months, still close to an economic record. The longer they stay unemployed, the less likely they are to ever find a job. Employers tend to give preference to job seekers who have jobs, or who have been out of work for short periods.
• While the private sector added more than a quarter million jobs, the public sector kept laying off workers. State and local government shrank by another 22,000 in April. This is a confession of a policy failure. In a severe economic downturn, government should be adding jobs to make up for the softness of the private sector. But with austerity fever sweeping both parties, the idea of a public jobs program is off the table.

President Obama had a good couple of weeks. He deftly surfaced his long-form birth certificate, a move whose timing baffled pundits until the other shoe dropped — and the public appreciated that he was grappling with very consequential matters while his opponents were mired in trivia. The mission to capture or kill Osama bin Laden displayed presidential nerve and leadership that has often seemed missing in this administration.

But despite the president's enhanced stature on national security issues and his success in showing up his critics, the 2012 election will be mainly about the economy. With so many Americans still out of work, a large number of voters have a co-worker, friend, or family member suffering from joblessness.

It is easy to construct a national scenario in which Obama is plainly a more formidable candidate than any likely Republican nominee. The trouble is that we elect presidents state by state. And it will be hard for an incumbent to win if the economy in the key swing states of the Midwest remains deeply depressed.

It might be easier if the president were pushing hard for a robust recovery program while the Republicans were promoting slash-and-burn austerity. Obama could then point to the sluggish recovery and clearly lay it at the Republicans' door.

But Obama himself, though he has admirably defended Social Security and Medicare, forcing Republicans to distance themselves from Rep. Paul Ryan's proposed plan to turn Medicare into a voucher, is nonetheless giving more attention to deficit reduction than to job creation.

Long after the skirmishes over this year's budget cease dominating the news, when the government stays open and the United States does not default on our national debt, the major issue before the voters in 2012 will still be the condition of the economy, not the deficit. Though Obama's version of fiscal austerity is kinder and gentler than that of the Republicans, cutting the deficit while the recovery is still fragile could well slow growth and blur political responsibility.

The ambiguous April jobs numbers are a signal not of green shoots but of the perils of premature belt-tightening.

There are now three parties of austerity dominating the economic debate, while the party of jobs and growth is scarcely heard from.

We have the Republicans demanding draconian cuts in the name of fiscal responsibility, even though their proposed tax reductions would leave the deficit almost where it was. Then there is the Wall Street austerity party, willing to entertain tax increases (on others) as well as program cuts. And finally, the White House, with a more moderate forced march to fiscal discipline, but still a misplaced emphasis on deficit reduction.

In November 2012, if unemployment is still high, Obama will get scant credit for a better fiscal picture. He owes it to his supporters, to America's millions of idled workers, and to his own re-election prospects to pay more attention to jobs.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency in Peril.

The global economy may be a mess, but the world's central bankers like to congratulate themselves for one thing. Inflation has been tamed.

Sorry, bankers, but the low level of price inflation has little if anything to do with skilled central banking. In the short run, the absence of price pressure reflects the prolonged recession. And for the past decade or so, the low inflation is the result of China's low wages.

That's right. Consumer prices are flat in substantial part because China sends us so much stuff, dirt cheap. This puts downward pressure on prices. The real price is paid both by Chinese workers who are paid a pittance and by American workers who either restrain their own wages or watch jobs move to China.

But all that may be changing, and the change will be a mixed blessing.

China, long politely criticized by the US government for managing the value of its currency, is now allowing the renminbi gradually to rise in value.

Analysts say China wants a stronger currency to fight inflation.

China is both contributing to the inflation and suffering from it, by being such a large new buyer of raw materials that it drives up prices. A stronger Chinese currency means that the price impact is buffered — for the Chinese.

China has also been criticized for its low wages. But the Beijing regime has also begun allowing wages to rise, as part of its strategy of domestic development.

Bottom line, stuff from China won't be quite as cheap. That, along with the impact of higher worldwide commodities prices, means higher inflation on the horizon for the US. Unlike the Chinese, we are not letting our currency appreciate in value. We are watching it fall.

What does all this mean? Economics, infamously, is the science of on-the-one-hand-this, on-the-other-hand-that. On the one hand, it's about time that China let its currency behave more like others and began paying its workers more than a pittance. A more expensive Chinese currency and better Chinese wages will be marginally good for American exports, and also good for US wages.

On the other hand, the free ride on inflation may be ending. If so, we could face pressure to raise interest rates at a time when the economy is still suffering from very slow growth and very high unemployment. That means a worse recession.

Professor Charles Kindleberger famously argued in his 1973 book, The World in Depression, that the world economy needs a hegemonic monetary power, to provide a reliable currency, and to be both a lender and a market of last resort. Britain played that role in the 19th century, and the US after World War II. According to Kindleberger, the interwar period was such an economic disaster because no country played that role.

China is fast becoming the monetary hegemon of the 21st century. It has done a benign job of buying our bonds at low interest rates. But it has done a terrible job of opening its markets or managing its currency in the world's interest. On the contrary, its behavior has been entirely mercantilist, in its own self interest.

But if China starts behaving more like a normal nation, we could end up paying more to sell our bonds, and having to deal with higher inflation as well. And, increasingly, China will be in the drivers seat.

No hegemonic power is entirely benign. But the US in the postwar period wasn't bad.
It's hard to imagine China bearing its new-found economic power entirely with altruism.

Yet it would be comforting, but misleading, to scapegoat the Chinese. Yes, they do poach American jobs by subsidizing industry and paying crappy wages. But for the most part, the current crisis was made in U.S.A.

If we had had an industrial policy, we'd have a stronger manufacturing sector. If we hadn't let banks go nuts, we wouldn't have a prolonged economic stagnation. And if we hadn't gutted our tax code to reward the rich, we wouldn't have a huge deficit that required the Chinese to buy so many bonds.

Like it or not, China is now the 800 pound gorilla of the world's economy. The thing about such beasts is that tend to do what they please.

Read the original article on The Huffington Post.

Robert Kuttner is the author of A Presidency in Peril.