December 13, 2010

Our Long Succession of Ruling Classes: Rushing to Tomorrow with Eyes Wide Shut

by Hal Gershowitz

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The President proposed a national conversation about the proper role of government during last week’s hastily arranged press conference designed to smooth the ruffled feathers of his party’s bantam roosters who have been cackling their dissatisfaction over the common-sense compromise on taxes the White House reached with the new Republican leadership.  The American people seem quite ready to have that national conversation as should all serious candidates for Congress and the White House in the run up to the 2012 elections.  We doubt, however, that it is a conversation in which the President or those in his Administration really want to engage.  The President has tried really hard to sell to America European-modeled statism, budget-busting deficit spending, monetized public debt, and taxing our way to prosperity. Last month the people responded with a resounding, “No Sale!” But let’s have that conversation.

Just what should be the proper role of government? Let’s stipulate that America should provide a reasonable safety net for the neediest among us, and that the government must provide for the common defense of our nation and prosecute those who break the laws of the land.   Then what?  Do we continue indefinitely to provide retirement benefits through social security to individuals and families that have sufficient personal income to provide for their retirement without government assistance?  Need we pay through Medicare for routine illnesses and ailments for those seniors who can afford to handle the less serious and less costly illnesses themselves?  As life expectancy continues to improve shouldn’t retirement eligibility be adjusted as well?

Shouldn’t Congress be expected to eliminate defense spending that the Pentagon itself says it doesn’t need or want?  Has increased federal funding for education resulted in increased achievement by our schools and their students?  Shouldn’t too big to fail sometimes also be too big to be? We could go on for several pages posing questions the answers to which might seem obvious to most people who are worried about where the country is headed.  There is, however, the one overriding question the answer to which makes all of the other questions superfluous.  Just what should be the role of our government?

America should still be premised on the original idea collectively formulated by the Founders.  We were founded as the world’s first meritocracy, where citizens were free to determine their own destiny, free to choose (to borrow from Milton Freidman) free to excel and, yes, also free to fail.  Sure, times have changed. We’ve become more diverse, we’ve grown by leaps and bounds, we are more closely tied to the other nations of the world and we have friends who wish us well and enemies who systematically plot our demise.  But, it seems to us, none of these realities negate our very raison d’être; the essential idea that was, and should still be, what has differentiated us from most of the other nations of the world.  What in the world is it that we see in these other nations that we should choose to emulate?  True, many of them have taken responsibility for providing for the needs of all of their people, many of which were once the personal responsibility of individuals and families. But in case there are still some people around who haven’t noticed, these nations from Great Britain to Japan have begun to collapse under the strain of the very burdens they have imposed upon themselves.  Austerity is the order of the day all over Europe. Mother Germany has made it clear that the rest of the European Union’s ailing pups cannot continue nursing at her breast. The public coffers are running dry just as they have begun to run dry in state after state here in America.  And but for the Treasury Department’s printing presses they would be running dry in Washington too.

Sadly, we have for years been pursuing policies that are both unsustainable and irresponsible.  We have sent a generation of leaders to Washington who have rushed headlong (to borrow from film maker Stanley Kubrick) with eyes wide shut into commitments that threaten to cripple the financial integrity of the country.  The Federal Reserve, our central bank, prints money to enable the government to become its own creditor in order to buy debt in competition with marketplace investors in an effort to keep down the rate of interest the government must pay for the money it borrows.  This past week we saw early indications that the so-called bond vigilantes may not continue to dance to Washington’s off-key tune.  They didn’t come to the treasury auction party and interest rates crept up in spite of the faux market the Fed is trying to create for the nation’s debt.

Then there is the looming problem of the fiscal condition of our several states. According to the Economic Policy Journal, “the majority of American states are currently insolvent, and…the US Treasury has been conducting a shadow bailout of at least 32 US states. Over 60% of Americans receiving state unemployment benefits are getting these directly from the US government, as 32 states have now borrowed $37.8 billion from Uncle Sam to fund unemployment insurance. The states in most dire condition are, not unexpectedly, the unholy trifecta of California ($6.9 billion borrowed), Michigan ($3.9 billion), and New York ($3.2 billion).”

It is estimated that state and local indebtedness has now reached about $3 trillion. With the apparent exception of New Jersey, where Governor Chris Christie has dug in his heels and has actually taken serious steps to end the state’s profligacy, the nation’s state houses seem to be lining up for massive federal bailouts which Washington has no choice but to resist.  This resulted in last week’s selloff of state debt instruments by the bond markets.

And just last week a member of the governing council of the European Central Bank (ECB), Nout Wellink, who also is the chief executive of the Dutch Central Bank, declared that it was not the central bank’s job to save countries on the brink of insolvency.  The European Central Bank nonetheless kept buying euro‑zone government bonds (well, if the Fed can do it here, why shouldn’t the ECB do it there?) This practice, not surprisingly, has drawn sharp criticism from Dr. Axel A. Weber, President of the Deutsche Bundesbank.

When asked if the bond buying by the European Central Bank was designed to fool speculators in Irish or southern European debt (that is, to make it appear that the market for the debt was greater than it actually was) Wellink sheepishly replied sometimes “we want to wrongfoot the markets.” At least they call the proverbial spade a spade.

Changing direction won’t be easy. Once people have come to rely on government to supply benefits they could supply for themselves they see that particular government support as immutable.  Fiscal discipline in a single budget cycle will not be sufficient to correct our long‑term course.  The national conversation the President proposed, if it is not to be just a cliché, must have as its centerpiece, the concept of what “shared sacrifice” really is.  Many of the concepts embodied in the Bowles‑Simpson commission study would make a good jumping off point.

We have not, and, in our opinion are not, managing our fiscal affairs wisely.  We know it, most of the country knows it as our recent election so clearly indicates and our creditors here and abroad know it. That’s why a US dollar, which was worth 1/35th of an ounce of gold a few administrations ago, is now worth approximately 1/1400th of an ounce of gold.  We’ve been running with our eyes wide shut long enough. It’s time to seriously look at where we’re going.

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