Tuesday, September 16, 2008
True Conservatives worship at the altar of the Invisible Hand of the Marketplace. They believe if they just get government off the back of business, all will be well. Adam Smith told them as much in Book IV of his Wealth of Nations back in 1776.
The past century has shown that Smith's theory was about as realistic as Disney's castles. The economy does not function well when unregulated.
Brian Mulroney deregulated Canada's airline industry. That pitted two, reasonably good airlines against each other to the benefit of neither. They slashed themselves to ribbons, the winner being the one that bled out the slowest.
America has been hit with a succession of jolts since the Reagan era of deregulation: the Savings & Loan scandals (there were many in case you forgot); the "Dot.Com" bubble; the Enron/WorldCom et al meltdowns; and, now, the subprime mortgage/derivative fiasco that is already being felt around the world. In each of these disasters small investors got wiped out in droves and, in most, small taxpayers wound up saddled with the cleanup bills. In each case regulators looked the other way until it was too late. Their reliance on the Invisible Hand was misplaced.
The uber-right, including our own Furious Leader, often and loudly warn of "massive transfers of wealth" caused by the pernicious ways of those lefties. Where? When? The previous paragraph details four - count them, four - massive transfers of wealth that devastated the life savings and retirement funds of hundreds of thousands of little people - aided and abetted in each case by right-wing deregulation and lack of oversight.
Now, imagine what would have happened had George Bush succeeded in privatizing his nation's Social Security, funneling all those worker contributions into the very stock markets that are now in meltdown. Had he got his way this crisis could well have been both far deeper and more widespread.
The globalization hatched by Reagan/Thatcher/Mulroney has likewise effected an enormous transfer of wealth. Western wealth stopped being invested in growing our own economies and, instead, was diverted into growing the economies of places like China. We surrendered the factories and the jobs that went with them in order that the rentier class could temporarily maximize their investment returns abroad.
In his book, American Theocracy, Republican notable Kevin Phillips outlines the inevitable collapse of American economic domination by illustrating how the changes underway in America since Reagan directly parallel the changes that led to the end of the Dutch, Spanish and British empires.
In each case the dominant nation outsourced its manufacturing sector and moved, instead, toward financialization. In the United States, the financial sector has long been the dominant economic engine. But, in outsourcing, what happens is that the dominant nation's wealth is gradually invested in growing another nation's economy. The dominant nation steadily weakens itself even as it strengthens its successor. This is another side of Adam Smith's Invisible Hand. Short term gain, long term pain.
Globalization has taken on such a degree of fiscal intractability that no one dare challenge it, especially none from the conservative ranks where it was hatched. It stands as the fatal contradiction in conservative ideology. Surely conservatism is about preserving the status quo above all else. Since the Nixon/Reagan era that foundation has been perverted to make growth the dominant and guiding force. The status quo is founded on sustainability. Growth, by contrast, is not bound by any such criteria. It looks, instead, to immediate and short-term rewards while diminishing the significance or even ignoring long-term consequences.
Here's something to chew on. When Ronald Reagan moved into the White House, America was the world's largest creditor nation. When he left, America had become the world's largest debtor nation. One president, two terms. Does that sound very conservative to you?
Since we've hitched our horse to America's wagon it would probably do us no harm to notice that all four wheels are beginning to fall off. These wheels are the four American deficits discussed by the United States Comptroller General, David Walker, in a 2007 speech given at the US Naval Academy. This is a bit long but it affects each of us directly and it's worth reading:
The truth is our country faces not one but four interrelated deficits. Together, these deficits have serious implications for our future role in the world, our future standard of living, our future domestic tranquility, and even our future national security.
The first is the federal budget deficit. Thanks to a combination of out-of-control federal spending, several major tax cuts, and expired budget controls, federal budget deficits have returned with a vengeance. Depending on which accounting method you use, the federal deficit last year ranged from $248 billion to $450 billion. The $248 billion number reflects the unified budget deficit—net of the Social Security surplus—which is the most commonly reported measure. This largely cash-based figure represents the difference between revenues and outlays for the government as a whole in a given year.
But it you look at the net operating cost of the federal government on an accrual basis, which is how companies report, you get a deficit of $450 billion. This number is more useful and, I would suggest, more realistic. Among other things, this number excludes the Social Security surpluses.
While these annual deficit numbers get a lot of press coverage, it’s the federal government’s mounting liabilities and unfunded commitments that pose the real threat. I’m talking about things like unfunded Social Security and Medicare benefits. In the last six years, the estimated total of these accumulating burdens has soared from about $20 trillion to about $50 trillion, primarily due to an increase in unfunded obligations associated with Medicare.
Fifty trillion dollars translates into an IOU of about $440,000 for every American household. Keep in mind that the median household income in this country is less than $50,000 a year. For the typical family, it’s like having a mortgage that’s 9½ times their annual income. And that mortgage doesn’t even come with a house! This burden is outpacing the net worth of most Americans and the growth rate of our economy.
The second deficit is our savings deficit. The savings rate among U.S. consumers has been falling for some time. In 2005, for the first time since 1933, the annual personal savings rate in this country reached negative territory. The savings deficit was even greater in 2006. We’ve returned to savings levels not seen since the depths of the Great Depression. In fact, America has among the lowest overall savings rates of any major industrialized nation.
Clearly, many Americans,like their federal government, are living beyond their means. This trend is particularly alarming in an aging society like ours. Obviously, those people who save more will live better in retirement. And given the problems plaguing our public and private retirement systems, personal investments will be even more critical to your retirement planning.
So if we aren’t saving here at home, who’s been underwriting our recent national spending spree? The answer is foreign players. And that brings me to America’s third deficit: our balance-of-payments deficit. America is simply spending more than it’s producing. As you’ve probably learned in economics classes here at the Academy, large government deficits translate into large trade deficits as well as a weakened dollar. So, it shouldn’t surprise you that in 2006, our trade deficit hit a record $763 billion and the value of the dollar has in fact declined.
While our own savings rates have plummeted, overseas savings rates have not. Overseas money has been pouring into the United States. Thanks to the high savings rates in China, Japan, Korea, and elsewhere, it’s been relatively cheap for Americans to borrow. But there’s a catch, and it’s a big one. Increasingly, we’re eating our seed corn and mortgaging our future. Furthermore, some of our leading lenders may not share our long-term national interests. Imagine what would happen to interest rates if some of these investors suddenly cut back on their appetite for U.S. Treasury notes.
Finally, there’s America’s leadership deficit, which is probably the most serious and sobering of all. At both ends of Pennsylvania Avenue and on both sides of the political aisle, we need leaders who will face the facts, speak the truth, work together, and make tough choices.
Anyone who believes that the right is the party of sober, fiscal management would do well to review its record of the past four decades, both in the US and here in Canada. The record speaks for itself.
Mulroney, in his scant two terms, added 40% to Canada's national debt even though the economy was relatively strong during that period and his government had the added revenue stream of the Goods & Services Tax. The Canadian economy was left on the ropes and had to be turned around by Liberals John Chretien and Paul Martin. Common Sense Mike Harris left Ontario awash in deficit. Conservative Grant Devine left Saskatchewan on the verge of bankruptcy to be rescued by New Democrat Roy Romanow.
On both sides of the line the right-wing clown car keeps running around in the same circles and yet we keep buying the line that they're the ones who are responsible. And so we now find ourselves at the edge, staring down into the abyss of Right-Wing Meltdown. Oh when will we ever learn?