The end of the republic is nigh

December 1, 2011

This is going to sound overly dramatic. I believe we are headed for real political trouble in the coming decade. I don’t see a way out of it. I know there are reassuring voices who have said, and continue to say, that the election of this or that candidate will not be the end of the republic. I hope they are right, but I think they are wrong. I will explain why.

There are some who get it, that we are headed for a fiscal cliff if we continue the way we are going, but very few people, relatively speaking, understand what the real fiscal problem is. It’s apparently too complicated for most to grasp. It’s a lot easier to see things in terms of class strata, and who is or isn’t getting what.

I have come to really question the wisdom of TARP, which I once advocated in the most impassioned tones that we pass back in 2008. I have since realized that the people I was listening to back then were capitalists, but they were also anti-market business types who believe that the government should solve our problems. They probably didn’t deserve the respect I gave them. I am still not sure TARP was a bad idea, but I now take a dimmer view of it. I am now against the idea of doing anything similar to that again. We cannot afford to reward malfeasance. It just leads to more of it, which I fear we will feel the repercussions of in the future. One of the problems it has created is it has emboldened the left. It has enabled them to say, “The rich got bailed out by the government, but now the Republicans want to abandon the middle class,” by denying them unemployment and retirement benefits. This is going to come back to bite us hard! The Tea Party has been on the side of good, in my mind, looking at the situation realistically, but they’ve been cast as extremists, and the public has come to believe it. Most people now blame the Tea Party for the recent debt debacle. In my opinion the Republicans have flubbed this year. Twice now they have tried to pass large budget-cutting bills, and each time when push came to shove they backed off, resulting in effectively no change in spending. Sure, there have been some cuts, but they’re the same amount the government spends in a week. Each time it took them at least a month to get to that point, so the gains in solving the fiscal crisis are moot. It was all theater.

Some pundits have patted the Tea Party and Speaker Boehner on the back, saying they did an amazing job “changing the conversation.” Well they may lose the majority in the House next year. They’re not that popular right now. A lot of good that’ll do.

I make this prediction. Obama will win re-election next year, regardless of how unpopular he is right now. We may get a Republican senate, though. Here’s why I think that. Most of the people who voted in the House majority did not want Medicare to be cut or modified. The Republicans in the House have proposed doing that. It’s necessary. I think Rep. Paul Ryan’s plan was a good first shot at it, but even the Republican base hated it. The Tea Party Republicans put forward other proposals that cut back Medicare. The reason is it’s necessary. We can’t afford the rate it’s expanding anymore, mainly because of Medicaid’s growth in spending. Now they’re unpopular. The Democrats keep saying we need to raise taxes on the rich. That could be part of the mix, as far as I’m concerned. The reason is history shows that the top tax rate has no discernible impact on job creation. It may have an impact on GDP. I haven’t analyzed that yet. In any case, it can be the Democrats’ token issue they take back to their constituents. It won’t solve the problem, but apparently it would make the medicine go down better for some. I think it’s a worthy concession if it can be used as a bargaining chip to get Democrats to agree to huge budget cuts. Personally I think this is where the Republicans might’ve misplayed the whole situation. They insisted that taxes be off the table.

What I find really disturbing though is this year proved that this country does not have the stomach for budget cuts, at all, and we really need them now, and in the near future! The cuts that are coming as a result of the failure of the “super commission” are reversible. Maybe not next year, but the year after next. Besides, the cuts are not that significant from a budgetary perspective. The federal government is overspending by $1,400 billion a year. The cuts that take effect in 2013 as a result of the deal struck in July (and the failed “super commission”) are $120 billion a year. That’s less than a 10% chunk out of what the government is overspending. So now the government will be overspending by $1.28 trillion a year, instead of $1.4 trillion, that is if it doesn’t add on more spending after this. What accomplishment is that?

The one thing out of the Bowles-Simpson Commission that I think has real heft to it is the prediction that we are facing a known economic threat that will be caused by our government’s overspending, and it’s entirely preventable. However we may just walk right into it anyway, if we don’t get our act together and understand what will cause it. The reason being that the causes they identified are the very federal programs most voters don’t want cut: Social Security and Medicare/Medicaid.

This is the reason I fear for the very existence of our republic. So long as we keep not understanding the problem, we will step closer and closer to this crisis, like a sleepwalker. The financial crisis in Europe is not helping matters. It’s causing foreign investors to buy our bonds, which makes the interest rates drop temporarily, in a flight-to-safety move. This is causing people now to question whether there’s a debt crisis in our country at all. I mean, the bond yields are at record lows! What’s the problem? However, this is only temporary. The moment we look insolvent, our bonds will be dumped like a hot potato. I imagine the Federal Reserve will monetize the debt in that instance, increasing inflation, rather than allow interest rates to float.

Once before our country borrowed 118% of its GDP, and managed to keep its AAA rating. That was during WW II. We cut spending massively in 1947/48, after the war. Here’s what’s different now from then. We keep saying we need our retirement programs as-is, but these programs will kill our economy in the next several years. Social Security didn’t really get going until the Eisenhower Administration in the 1950s. Medicare didn’t get started until Lyndon Johnson’s term in office, starting in the mid-1960s. We appear destined to walk right into another financial crisis. I don’t see a way out of it politically yet.

Our past history is that electing one-party Republican governments doesn’t help the problem. It just delays the inevitable. Bush and the Republican congress spent more than Clinton did in his 8 years in office. That’s part of the reason we’re in this mess, though I hold Obama and the Democrats more culpable, because they’ve taken what Bush spent and tripled it, upping our deficits massively!

What I see we need this time around is a Democratic president with a Republican congress (House and Senate). This combination worked out well in the 1990s, because they were motivated to oppose each other. There were some contentious fights, and even a government shutdown, but they managed to get budget surpluses. I can’t imagine us getting such an outcome now, even with that arrangement, with our deficits the way they are. That would be too big a change, but I’d at least like us to get our budget deficit down to what Bush’s yearly deficits were, as a first goal, which was about $600 billion a year (and that was just 3 years ago!) That, at least, our government could manage. The thing is, I doubt we’ll get there, because getting down to that level will require cutting into programs we don’t want cut.

The long term goal is we need to have a growing economy. Here’s the dirty little question hardly anyone is asking: Grow with what? Each growth boom we had in the 20th century was spurred by invention. In the 1920s it was the invention of radio. In the 1950s it was the invention of modern appliances in our own industrial revolution. In the 1980s it was the computer revolution, and in the 1990s it was the deregulation of the internet and telecommunications. What do we have now? We won’t know unless our government deregulates small business, and establishes consistent policies that businesses can predict. Right now our government is not doing that, and we appear to have no political inclination to do so.

We could enter another Great Depression. Some Democrats even look forward to this. The private sector would be stifled. They remember FDR’s anti-business stance, and his government programs with fondness. The difference is now we have an America where a large swath of the country is dependent on government programs. We don’t want them cut, especially in this economy. If we don’t cut them, though, the economy will stay bad. Unless that political dynamic is broken, our state of economic depression will drag on for a few decades at least, not just one. What will make things worse than the last great depression is we’ll be a country that is known as a deadbeat, that can’t pay its bills. So interest rates will be high. Before the Depression of the 1930s, the government ran a revenue surplus, and always paid its bills. There will be demand for the government to borrow more and more money from abroad, or from the Fed (increasing inflation), as our demand for government programs remains insatiable, because the government will not be able to raise the necessary revenues to support all of the spending. I see tax increases as inevitable, though they are politically unpopular. I think the Democrats will eventually push them through. That’ll help some, perhaps, on the revenue end, but the effect will likely be negligible. The spending will just reach higher and higher. The private sector will eventually be crowded out. We’ll just have large corporations surviving, which will work hand-in-glove with the government, and the majority of the nation’s economy will be taken up by the government. Our transformation to a socialist society will be complete, and the constitutional republic founded in 1789 will be all but dead.

I hope I’m wrong about this, but to me the key to turning this around is breaking our societal dependence on government largesse. Unless we do that, we doom the next generation to a life of hardship.

Some good articles on our economic and fiscal situation that address fundamentals

December 6, 2010

“Our burgeoning budget and the politics of avoidance”, by Robert J. Samuelson, Washington Post

“The rest of the world goes West when America prints more money”, by Liam Halligan, The UK Telegraph

“Mounting Debts by States Stoke Fears of Crisis”, by Michael Cooper and Mary Walsh, New York Times

“What the Bowles-Simpson plan left out”, by Robert J. Samuelson, Washington Post

The oil spill reveals what kind of (non)president we have

July 1, 2010

Dick Morris has pegged what President Obama’s strengths and weaknesses are as president: He is a legislator, a lawyer, and a populist big-spender. Obama is not an executive. I remember some months ago a pundit analyzed Obama’s picks for his inner circle. Unfortunately I can’t remember her name. She said that the whole team was geared towards advancing legislation. The sense I get is he sees his role as “legislator in chief”. He wants to rewrite the rules, not deal in “special cases”. Another way of looking at it is he’s rather like an architect. An architect does not deal with the mishaps of building the structure they’ve designed. That’s the general contractor’s job. Who’s the “contractor” in this scenario? The federal bureaucracy. From what I’ve been hearing lately, this is the reason for the slow and tepid response to the oil spill. He’s letting the bureaucracy deal with it.

It reminds me of something Yuri Maltsev said about the Soviet Union when people would wait in long lines to buy toilet paper. He said that in the Soviet system all of the prices of products were required to be set by their leaders. The problem was the leaders were “big thinkers”. They spent most of their time on major items like the space program, not on “little” things like toilet paper, condoms, etc. So shortages of products developed, because the market was totally inflexible. We’re dealing with a similar situation here. The incidental items are “too little” for Obama. So he doesn’t want to deal with them. At the same time, since the federal government has its fingers in so many little things, it’s obstructing the ability of the people to solve our nation’s problems by themselves. More than once federal bureaucracies have gotten in the way of citizens’ efforts to help clean up the oil spill. The federal government has also interfered in a big way in our economy, putting a damper on private efforts to revive it.

I think this explains the Obama Administration’s tone deafness on the economy. He’s just not into it. However, a lot of Americans think that it’s the president’s job to try to make the economy better YESTERDAY, and to help immediately with things like this oil spill.

Unfortunately we don’t have that kind of president. He is about making big things happen, but it all has to do with reorganizing the government, and supposedly “having a plan” for his and his supporters’ agendas. He is not “Johnny on the stick”, managing crises as they arise. Rather he sees crises as opportunities to advance his agenda, because his agenda is what he’s all about.