By contrast, means-tested programs including food stamps, Medicaid, Supplemental Security Income, and the earned-income tax credit account for just $7 trillion, or 22 percent, of projected domestic spending under current law. Upon being slammed by Ryan’s fiscal meat ax, however, the current law figure would have been cut by 30 percent over the next ten years. This meant that citizens who had (mostly) proved they deserved help from the state and were by definition on the ragged edge of financial survival would take a $2 trillion punch in the chops.
Ryan and his fellow travelers have never presented any evidence of sloppy eligibility criteria or outright cheating to the tune of 30 percent or even 3 percent. Nor have they made any pretense of an effort to selectively repair and strengthen the safety net as we did in the 1981 Reagan entitlement reforms. Instead, Ryan’s $2 trillion assault on the means-tested safety net was simply a goal-seeked number: it functioned as a “plug” to affect the appearance of fiscal retrenchment, while being gussied up as a block grant “reform.” Under it, states would take over medical, food, and income assistance to the poor, albeit with 30 percent less money.
That was a shameful ruse. No governor was any better equipped to find economies in nursing home costs or emergency room visits than current federal policy makers and administrators. The means-tested safety net is just not an issue of federalism; it’s a question of how to design and deliver welfare benefits in a manner that is efficient and fair, that minimizes moral hazard, and most importantly, avoids capture by crony-capitalist vendors.
As seen, Milton Friedman had the right answer, and it involved an all-cash, single-benefit system integrated with the federal income tax, not an arbitrary dump of Washington’s most justifiable function on fifty ill-equipped state governments. In truth, the block grant cop-out was the smoking-gun evidence that the Romney-Ryan Republicans had reached a state of intellectual bankruptcy.
SOCIAL INSURANCE AND DEFENSE:
ROMNEY’S BIG GOVERNMENT
Indeed, having doubled down on another massive dose of revenue depletion ($5 trillion), Romney was in the same position as the Reagan administration had been in February 1981 when it launched its own giant tax-cut program; namely, it was obligated to make a frontal assault on the social insurance core of the domestic budget to sustain fiscal balance.
Plain and simple, social insurance is the true essence of Washington’s “overspending” problem. The $19 trillion slated for it over the next decade is what makes the welfare state too corpulent, and also demonstrates why universal entitlements are offensive to the very idea of a limited state.
But the Romney-Ryan deficit howlers offered no “Schweiker plan” (see chapter 6) or any other measure to stop the massive outflow of Social Security and Medicare benefit payments to affluent retirees. Never had there been a better time to insist on a sweeping means test. After all, affluent social insurance recipients were the very epicenter of voters who believed most passionately that trillion-dollar deficits were a deadly economic threat and who thought voting for Obama was beyond the pale. Indeed, championing a means test for social insurance would have put Romney on the right side of the class war, rather than being postured as wanting to throw grannie out in the snow to fund tax cuts for billionaires.
Yet Romney-Ryan offered a spending cure which was both cowardly and a legislative nonstarter. The proposed $2 trillion in savings over ten years from shredding the means-tested safety net was entirely illusory; as indicated, it depended upon enactment of sweeping block grants that would massively shortchange state and local budgets that were already teetering on fiscal collapse. Needless to say, forty years of history going back to Nixon’s abortive “special revenue sharing” reforms demonstrated this kind of lopsided swap within the federal system would never see the light of day. In short, the Romney-Ryan fiscal plan was the ultimate incarnation of the GOP’s embrace of free lunch fiscal policy.
And that wasn’t all. Candidate Romney also chose to surround himself with neo-con foreign policy advisors, led by the bombastic John Bolton, former Bush ambassador to the UN and warmonger extraordinaire. The Romney national security budget therefore called for spending $800 billion annually in order to sustain and modernize the machinery of invasion and occupation required by the aggressive ambitions of neo-con foreign policy.
In inflation-adjusted dollars the Romney neo-con defense plan thus amounted to 200 percent of Eisenhower’s final budget, a plan which had been set against a real nuclear-armed enemy and which had also had been wrapped in a prophetic warning about budget aggrandizement by the military-industrial complex. Had Ike been here today, he would have sent Bolton and his posse of neo-cons packing and put candidate Romney through a heavy remedial education on the limited uses of military power in a world where the United States has no industrial state enemies.
In all, it can be well and truly said that the 2012 election campaign of the Romney-Ryan ticket brought fiscal sundown to America. In what was a “last chance” election to confront the looming fiscal calamity, the purported conservative party served up a potpourri of budgetary flimflam, delusion, and lies. In so doing, it left the American electorate in the dark with respect to the dire challenges and painful austerity which lies ahead. Likewise, the congressional Republicans who survived the Romney defeat had sought no mandate that was remotely geared to fixing the nation’s giant fiscal gap. Instead, they merely promised to continue tilting at Big Government windmills and repeating ritual incantations about tax cuts for job creators.
Fiscal governance has thus been reduced to a doomsday machine. With the voice of the old-time fiscal religion terminally silenced, there is no counterpoint to the din of bastardized Keynesianism emanating from both parties; that is, the shibboleth that the US economy is too weak to ask either the “job creators” or the “consumption units,” as the case may be on the respective sides of the partisan aisle, to shoulder the taxes needed to pay the government’s bills. Indeed, after the November election the initial rounds of the so-called fiscal cliff battle amply demonstrated that Washington is mired in dysfunction and drifting into national insolvency.
ROMNEY’S WALL STREET SHILLS
Candidate Mitt Romney’s whiff on the looming fiscal crisis, however, was just a warm up. Even more consequential was his complete failure to grasp that free market capitalism was failing in America because it had been fatally corrupted by two decades of Wall Street coddling by the Fed and nearly four decades of worldwide floating money and central bank monetary inflation. To be sure, he had called for Bernanke’s replacement during the primary campaign in order, apparently, to parry Governor Rick Perry’s fusillade in the direction of the Eccles Building.
But Romney’s choice of his top economic advisor was proof that he was dream-walking in the great financial bubble that had been fostered by the nation’s central bankers. According to the headline of a New York Times profile, the candidate’s “Go-To-Economist” and author of the campaign’s official economic platform was one R. Glenn Hubbard, dean of the Columbia Business School, and George W. Bush’s chief economic advisor and architect of the 2001–2003 “Bush tax cuts.” Not surprisingly, Hubbard was of the opinion that the Wall Street–coddling policies of the Greenspan-Bernanke era had been a roaring success. He suggested that Romney should consider keeping Bernanke on board because he had been a “model technocrat” who was owed a “pat on the back.”
As indicated earlier, the single most noxious deformation of bubble finance had been the $5 trillion MEW spree of the nation’s household sector. It had been the proximate source of the consumption binge that left American families buried in mortgage debt and the residential housing industry in smoldering ruins.
Yet Hubbard had been an unabashed proponent of MEW. Near the very top of the housing bubble and after gross mortgage financings had hit the freakish level of $5.3 trillion, or 40 percent of GDP, in the spring of 2003, Hubbard opined that the “revolution in housing finance” which had led to “large increases in mortgage equity withdrawal” had been a salu
tary development; it was “one reason why consumer spending held up well” during his tenure as chairman of the White House Council of Economic Advisers (CEA).
This is pure Keynesian blather, but Hubbard was not yet done. In an article co-authored in late 2004 with William Dudley, who was then chief economist at Goldman and is now Bernanke’s right-hand money printer as president of the New York Fed, he averred that due to the Fed’s unleashing of the Wall Street casino there had been a “dramatic decline in the cyclical volatility of housing.”
Say again! It is not surprising that Hubbard did not see the most violent collapse of housing in American history looming just around the corner: he was a full-fledged proponent of bubble finance. Accordingly, Hubbard and Dudley had found “100 percent financing to purchase a home” to be a key contributor to the great prosperity purportedly under way at the time. An exasperated blogger rightly tagged this as “the mortgage bankers’ equivalent of ‘The Anarchist Cookbook’—a recipe for disaster.”
Cookbook in hand, however, Hubbard kept candidate Romney firmly planted in the Wall Street–Fed consensus. Consequently, voters did not hear a word about the true menace stalking the land; namely, that their livelihoods, future prospects, and efficacy as citizens of American democracy were under relentless assault from the monetary politburo which inhabits the Eccles Building.
Here was a chance, in the first election after the dust had settled from the Bernanke-Paulson-instigated BlackBerry Panic, to call out the real source of what Romney appropriately called the “failing” American economy. Romney could have blasted financial repression as a gift to Wall Street speculators that undermined honest capital markets, crushed Main Street savers, battered low-and middle-income families with soaring food and energy costs, and enabled the nation to live far beyond it means while putting it in hock to the rest of the world by $8 trillion.
Instead, Romney-Ryan blamed it all on Obama, notwithstanding the inescapable facts—obvious to the overwhelming share of voters—that the terrifying meltdown on Wall Street and the associated sharp plunge of the American economy had occurred on the Republican watch of George W. Bush. So by their silence on the Fed and their defense of failed free lunch fiscal policies, the Romney-Ryan ticket failed to give the electorate a credible reason to abandon an incumbent who drank his Keynesian Kool-Aid straight up. Under the second Obama administration, therefore, big deficits and massive money printing will occur as a matter of policy choice, not simply as the default outcome that was implicit in the half-basked nostrums offered by Romney-Ryan.
Historians may someday wonder how the conservative party failed so badly when the very future of free market capitalism and fiscal solvency were at stake. The short answer would be that after three decades the entire party had become lost in the false world of bubble finance.
In that regard, a considerable share of blame could be assigned to the GOP’s final rash of crypto-Keynesian economic advisors like Hubbard and his successor, Greg Mankiw of Harvard, or Ed Lazear of Stanford. As Bush’s last CEA chairman, Lazear had insisted in May 2008 that “the data are pretty clear that we are not in a recession.” Needless to say, when the Wall Street meltdown struck with cyclonic force a few months later Lazear did not have the foggiest notion of why it happened. He just rolled over and watched Bernanke and Paulson stampede Washington into the BlackBerry Panic.
But ultimately the GOP is the party of businessmen and financiers, and it was they who in Jim Carrey–like fashion had spent decades in a great and artificial financial bubble, the economic equivalent of The Truman Show. Accordingly, they did not know why Wall Street collapsed in September 2008 and didn’t recognize that the American economy was dangerously leveraged at 3.6X national income. And most especially they did not perceive that the violent booms and busts on Wall Street had been the handiwork of a destructive régime of monetary central planning.
So failing to comprehend the crumbling world outside the bubble, they embraced a content-free revival of Reaganite rhetoric that was a veritable caricature of what Republican governments have actually done. They decried excessive regulation when economic regulation had peaked in the 1970s and had been rolled back ever since. In fact, the only thing of material import which had happened on the regulatory front since the Gipper’s time had been the disastrous “deregulation” of banks, licensed wards of the state which had never been free enterprises in the first place.
Republican governments of the Bush era had also brought federal spending to the highest share of GDP since WWII and turned the small surpluses of the Clinton period into a raging torrent of red ink. Self-evidently, after the mad-cap tax cutting of the Bush period the federal tax burden had been reduced to the lowest level in fifty years. In short, the Republican mantra that the nation was overtaxed and overregulated was utterly disconnected from the economic facts, as were its tirades against the deficit.
THE JIM CARREY OF BUBBLE FINANCE
Willard M. Romney did not see this, and for a compelling reason: he was the Jim Carrey of bubble finance. He had made a fortune during a twenty-year career in the studio, riding the wave machines of debt and leveraged speculation enabled and powered up by the Fed. Not surprisingly, Romney mistook the windfall riches garnered in the great hall of bubble finance for the fruits of honest enterprise on the free market, and was therefore blind to the profound monetary and financial disorders of the American economy.
Accordingly, his presidential campaign readily adopted the content-free Reaganite rhetoric against taxes, Big Government, regulation, and deficits. As Romney saw it, there was nothing wrong with the nation’s economy which couldn’t be fixed by a can-do businessman in the Oval Office who knew what it takes to rejuvenate the “job creators,” impose fiscal discipline, and unleash the capitalist energies.
In truth, this was pure political pettifoggery that would fix nothing, but it did underscore why Romney’s successful sojourn in the financial bubble had made him uniquely unfit to be the GOP standard-bearer. He had been a big winner because the state and its central banking branch had failed miserably. What was needed was not the unleashing of the battered and impaired remnants of free market capitalism, but a drastic throttling of the state’s engines of false prosperity; that is, an end to the madness of the Fed’s financial repression and rampage of bond buying coupled with the imposition of taxes on the electorate for every dollar of federal spending that the legislature was unwilling to cut.
A return to sound money policies, of course, would bring ruin to the 1 percent, and years of painful austerity to Main Street. Needless to say, the masses would not have cottoned to such a program, especially if championed by one of the baby boom’s biggest lottery winners. More importantly, Wall Street would have gagged and muffled their candidate before he could make a single utterance about cleaning house in the Eccles Building or taxing capital gains at the same rate as wage earners.
In fact, keeping the candidate safely enveloped in a fog of Reaganite rhetoric was exactly what Wall Street–oriented advisors like H. Glenn Hubbard excelled at. After all, the enterprising Professor Hubbard had been paid to investigate the operations of Countrywide Financial, for example, and found them laudatory. So it was plain that he could be counted on to keep the campaign looking with favor on gutting the Volcker Rule, keeping the giant Wall Street banks free from the threat of dismantlement, and empowering the monetary central planners to keep the juices flowing from the Eccles Building.
As seen in earlier chapters, bubble finance created a vast arena of financial engineering in which debt-fueled buyouts, buybacks, and M&A takeovers systematically channeled wealth and income to the very top of the economic ladder. But these windfalls did not foster capitalist growth and wealth creation on the free market; they simply extracted unearned rents from the Wall Street casino, and it was in the leveraged buyout business—where Romney made his fortune—that the most spectacular cases of this capture occurred.
So when all was said and done, Willard “Mitt” Romney was a crea
ture of the great deformation of finance that had been unleashed by the administration in which his father had served as secretary of HUD. History has left few clues about what George Romney thought about Nixon’s final destruction of the gold dollar, but his son’s business history documents in spades how Nixon’s actions eventually destroyed the free market in finance and fostered an unsustainable era of debt-fueled GDP growth and speculation-driven accumulation of wealth by the 1 percent.
That Mitt Romney turned out to be the conservative party’s candidate for president in 2012 is ironic in the extreme. As detailed below, Romney’s winnings from bubble finance during his years at Bain Capital were so preposterously impossible in an honest free market that it is no wonder that his 2012 campaign amounted to one giant platitude. He honestly thought his experience doing leveraged buyouts could show the way forward to ameliorate the nation’s economic ills. In fact, Romney had been an energetic agent of the very financialization process that had generated the economic failures against which he campaigned.
BAIN IN THE BUBBLE
The Bain Capital that Mitt Romney built was a product of the Great Deformation. Like much of Wall Street, it garnered fabulous winnings through leveraged speculation in financial markets which have been perverted and deformed by three decades of money printing by the Fed. So Bain’s billions of profits were not rewards for capitalist creation—they were mainly unearned windfalls collected from gambling in markets which were rigged to rise.
That is why Mitt Romney’s claim that his essential qualification to be president was grounded in his fifteen years as head of Bain Capital clashed so discordantly with the truth. It was also why Bain’s fulsome returns, which averaged more than 50 percent annually during Romney’s 1984–1999 tenure, were not evidence that he had learned the true secrets of how to grow the economy and create jobs or that he had been uniquely prepped for the task of restarting the nation’s sputtering engines of capitalism.
The Great Deformation Page 76