Our Failed National Economy

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Tuesday night’s
election result was a victory for deep partisan stalemate, polarization,
dysfunction, and acrimony throughout the halls of government. The
market badly wanted a Republican victory, and sometimes you get
what you wish for. Unfortunately, Mr. Market’s innocent dreams
of a more “business friendly” government will turn out
to be a nightmare of fiscal profligacy on a scale that’s virtually
unprecedented in modern history.

It’s now guaranteed
that the hapless soul who succeeds to the White House in January
2013 will preside over a nation with $15 trillion of reported public
debt, that is, debt at 100% of GDP and counting. On top of that
will be tens of trillions more in unfunded (and unreported) entitlement
liabilities – the financial burden of which will only intensify
as the baby boomers become fully retired. Worse still, Obama’s
successor will have no way to stop the headlong rush into national
bankruptcy he or she will inherit from this week’s earthquake because
the specious ideological shibboleths of both parties will have poisoned
the only policy tools – tax increases and entitlement cuts – that
can make a difference.

To see why
this scenario will play out, start with the bloodbath in the House.
The only specie of Democrat that’s even entertained the notion of
entitlement reform was the Blue Dog Democrat. As of this morning,
that particular specie is extinct. The remnant of the Democratic
caucus consists of aging, hard-core liberals who have spent a political
lifetime accumulating anti-Republican bile against the policies
of Reagan and the Bushes. Now, they’ll play the only card they have
left – fostering hysteria among elderly voters about social security
cuts.

The Democrat’s
prospects for success are excellent and the reasons will shortly
be evident. The gumption-challenged group of statesman appointed
to the president’s deficit commission by the pols of both parties
will soon issue the big cop-out – opining that Social Security
has a long-term funding problem, but not one that requires immediate,
deep cuts in current benefits. That proposition, of course, is a
convenient dodge that rests on the fiction of trust-fund accounting.

The fact is,
the Social Security trust fund has $3 trillion of paper IOUs issued
by the Treasury Department over the last 70 years, but not one dime
of real money. Over that time span, we collected a modest excess
of payroll taxes over current-year benefit payments, and spent the
excess cash on cotton subsidies, student loans, and aircraft carriers.
It’s all long gone.

The truth is,
the Social Security program is a $700 billion per year inter-generational
transfer payment program in which lifetime taxes paid by current
recipients bear only a faint and arbitrary relationship to benefits
now being received. So when the retirement “insurance”
and trust-fund fictions are cut away, the underlying program cries
out to be means-tested. To be sure, that would amount to a default
on the implicit social compact that has undergirded the program
since its inception. But in the context of the massive fiscal retrenchment
which is now unavoidable, there’s no rational alternative.

This is made
starkly evident by viewing the alternatives. The only other element
of the domestic budget of comparable size is the $600 billion we
spend on means-tested safety-net programs including Medicaid. Yet
unlike in the early days of the Reagan Administration when the president
could fairly make points about the abuses of what he called welfare
queens, today’s facts are very different. The safety net programs
were substantially reformed in 1981, and then thoroughly tightened
once again under President Clinton’s bipartisan welfare reform.
Any additional savings are thus likely to be in the tens of billions,
not the hundreds of billions actually needed.

Moreover, the
burden of safety-net spending is now likely to rise for decades
into the future because we’re inextricably mired in a failed national
economy. It turns out that there was no miracle of economic growth,
productivity and prosperity over the last several decades –
even if Wall Street stock peddlers and Republican orators still
cling to that illusion. What we had, instead, was serial bubble
after bubble – fueled by a tsunami of public and private debt
and printing-press money.

The deflationary
aftermath will be with us for years, and so will low single-digit
GDP growth, chronic double-digit unemployment rates, and swollen
levels of economic hardship among the lower ranks of society. In
that context, we won’t see the recent tripling of food stamp and
unemployment compensation expenditures recede in the conventional
cyclical manner, nor can we grow our way out of the currently ramped-up
level of safety-net spending. Like much else, the current $600 billion
social safety net is the new normal.

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the rest of the article

November
9, 2010

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