In earlier times, Romney’s plan would have been seen as crude pandering: an election-year gambit to relieve current American taxpayers of their duty to pay the cost of the government they had elected. But no longer. Giant fiscal deficits “as far as the eye can see” had been properly viewed as an ominous threat when they unexpectedly flared up in late 1981. By contrast, the allegedly “courageous” Ryan plan for fiscal 2013 did not sweat giant budget deficits for a moment: it did not get around to a balanced budget, even on paper, until a quarter century later.
If there was any doubt that the nation has two fiscal free lunch parties, the wanton profligacy of the George W. Bush era had already removed it. Still, the case was sealed by the sheer farce of the 2012 campaign in which Obama couldn’t name any tax he would raise except on the 2 percent, and Mitt Romney couldn’t say out loud a single federal program he would cut other than Big Bird’s stipend.
When every provision of the tax code and each line item of federal expenditure becomes a “jobs” program, then a condition of dissolute fiscal promiscuity has arrived. Under those circumstances there is no way to restore sound fiscal governance except by means of a constitutional chastity belt; that is, an inflexible balanced budget amendment. And a ban on a commitment of military forces anywhere outside of US borders without explicit authorization of Congress would help, too.
THE EPIC IRONY OF THE KEYNESIAN ERA:
FAILURE OF THE SAVIOR STATE
So it now transpires that sundown is descending upon America owing to the failure of the state, not the machinery of capitalism. That is an epic irony. The state has grown by leaps and bounds since the New Deal era precisely because it was presumed to transcend the imperfections and disabilities alleged to inhere in the free market.
Those defects comprised the familiar indictment of laissez-faire. They included destructive swings in the business cycle; structural economic dislocations among regions, industries and communities; and humanitarian failure with respect to the ills of aging, poverty, unemployment, disability, and disadvantage. So the state was given one assignment after another; that is, to counterbalance the business cycle, even out the regions, roll out a giant social insurance blanket, end poverty, house the nation, massively subsidize medical care, prop up old industries like wheat and the merchant marine and foster new ones like wind turbines and electric cars.
In the fullness of time, therefore, the state became corpulent and distended—a savior state that could no longer save the economy and society because it fell victim to its own inherent shortcomings and inefficacies. Taking on too many functions and missions, it became paralyzed by political conflict and decision overload. Swamped with unquenchable demands on the public purse and deepening taxpayer resistance, it became unable to maintain even a semblance of balance between its income and outgo. Exposed to naked raids by powerful organized interest groups and crony capitalists, it lost all pretense that the public interest was distinguishable from private looting. Indeed, the fact that Goldman Sachs got a $1.5 billion tax break in the New Year’s Eve fiscal cliff bill, legislation allegedly to save the middle class from tax hikes, is a striking if odorous case.
These evident warts and blemishes, however, remain invisible to the Keynesian touts who peddle risk trades on Wall Street and counsel more fiscal stimulants from Washington. Indeed, having become so inured to the state’s modern role as an omnipresent agent of economic fixes and fiscal largesse, they are stunningly blind to the oncoming “state-wreck.” Yet the mounting failures of the modern welfare-warfare state are every bit as serious as the ancient defects of the free market. Worse still, the misdeeds once attributed to the robber barons of laissez-faire are small potatoes compared to the depredations and extractions owing to the crony capitalists of the Keynesian era.
THE DEMISE OF GROWTH: THE “STATE-WRECK” AHEAD
The American economy would tumble into a paroxysm of economic contraction and financial market meltdown if its three umbilical cords to the state were severed. That is, the private economy has reached a state of utter dependence upon the central bank’s printing press, the bipartisan fiscal régime of perma-deficits, and the military-industrial complex that bolsters what remains of the manufacturing sector.
None of these lifelines are sustainable and each may be nearing its asymptote. But like an end-stage alcoholic who finally drinks himself to death, the system is so dependent upon these dispensations of the state that it will inexorably drift toward catastrophe.
Ironically, the enormity of this danger is obscured by the simulacrum of prosperity that flows from these very dependencies. To take one example, we have seen that half of personal consumption expenditure growth since 2007 has been funded by deficit-financed transfer payments. That’s phony growth borrowed from future taxpayers and injected into the economy by the consumption spending of transfer payment recipients.
If these safety net transfer payments were properly paid for by taxing the American public there would be no magical boost to GDP—just a state-commanded reshuffle among the citizenry of already existing income from current production. Accordingly, as indicated in chapter 31, even a modest normalization of the rates of household savings and personal taxation would reduce personal consumption expenditures by $1 trillion, or nearly 10 percent.
Yet that is only the leading edge of the state dependency that now undergirds the American economy. These enormous props include the massive inflation of energy and food commodities spurred by the Fed and its global confederation of money-printing central banks, and the freakish expansion of defense spending in a world where there are no advanced industrial state enemies. Save for these state-induced bubbles, the nation’s industrial economy would have been shrinking at an astonishing rate.
Not surprisingly, this reality is not immediately evident in the GDP aggregates which so mesmerize the Keynesian commentariat. Total shipments of manufacturing goods in the early fall of 2000, for example, were $4.3 trillion and had risen to $5.8 trillion by September 2012. This $1.5 trillion pickup seems impressive on the surface but is only marginally respectable, in fact, when the 25 percent gain in the GDP deflator during this period is stripped out.
Coincidently, this cumulative rise in the price level amounted to 2.2 percent per year, or almost exactly what the Bernanke Fed claims to be its ideal inflation target. Yet really? Even with this modestly dishonest rise in the price level, the aggregates are not what they seem to be. In fact, constant dollar-manufacturing shipments rose by just $200 billion (2012$), not $1.5 trillion during the twelve-year period, meaning that most of the nominal dollar gain was Bernanke’s wondrous inflation.
Even then, the resulting real growth in manufacturing shipments, at an anemic rate of 0.3 percent annually, might pass for the Greenspanian version of prosperity. According to the theory laid out in his memoirs, the United States doesn’t really need to grow its manufacturing output, since the Chinese and other exporters are chronic oversavers and eager to lend vast amounts of their excess savings to high-living Americans so they can buy Chinese manufactures. When the onion is peeled further, however, even that twisted rationalization doesn’t wash.
Even as total manufacturing shipments grew by just 4 percent in constant dollars between 2000 and 2012, shipments of real defense goods soared by 41 percent. That contrast alone is damning. Defense output by definition contributes nothing of economic value, and in this instance, the national security purpose for this giant expansion is also exceedingly hard to ascertain.
Indeed, it is now evident that there were never more than a few hundred Al Qaeda; that the invasions of Iraq and Afghanistan were grotesque mistakes and failures; that America’s rampaging war machine has generated new enemies throughout the Middle East and near Asia; and that a duly elected “peace president” has barely stopped the military spending momentum, even as he has begun to retract our imperial footprint.
Yet this needless defense bubble is only part of the illusion of growth. Another part stems from the great commodi
ty inflation generated by the Fed and its global convoy of money printing central banks after 2000. In round terms, energy prices rose 100 percent and food prices by 50 percent during this twelve-year period. Accordingly, another huge part of what passes for growth in manufacturing shipments consisted of food and energy inflation in the underlying raw materials, not true gains in manufacturing value-added.
Shipments of food and energy manufactures thus doubled during this period, rising from $1.3 trillion to $2.6 trillion. Yet when the vast inflation in these sectors is stripped out, constant-dollar output expanded by a much more modest 12 percent. And the internals of this $1.3 trillion inflation-swollen pickup are even more revealing.
Upward of $1 trillion, or 80 percent, of this gain represented windfalls to the upstream raw material factors; that is, farmland in Iowa, royalties on the North Slope, and rents to the princes and emirs who occupy the desert redoubts of the Persian Gulf. Under a régime of sound money, by contrast, economies throughout the world—especially those of China and the other BRICs—would have grown much more slowly during this twelve year period. In turn, lower-gear growth would have generated modest relative price gains for scare raw materials, not the elephantine windfalls and virulent commodity inflation that issued from the Eccles Building and the People’s Printing Press of China.
At the same time, the fact of this rampant commodity inflation means that the balance of the US manufacturing sector between 2000 and 2012 was downright punk. Thus, constant dollar shipments of non-defense consumer durable goods declined by 17 percent; real shipments of non-defense capital goods dropped by 24 percent; and real output of non-durable goods outside of food and energy shrank by a staggering 25 percent. In short, absent the printing press and war machine the American manufacturing economy would have already tumbled into a ruinous decline.
Indeed, in round aggregate numbers the picture is nothing less than startling. At the turn of the century, the US manufacturing economy outside of defense and the food and energy complex (e.g., “core manufacturing”) generated constant-dollar output (2012$) of $5 trillion. After twelve years of the (second) Greenspan bubble and the Bernanke bubble, core manufacturing output had tumbled to $4 trillion. This $1 trillion, or 20 percent, shrinkage in real terms is yet another measure of the big lie which undergirds the current simulacrum of prosperity.
THE FISCAL CLIFF:
WRECKING BALL OF THE KEYNESIAN STATE
The “fiscal cliff” gong show which traumatized the nation at the end of 2012 was rooted in a destructive symbiosis between Wall Street and Washington. It was portrayed by the mainstream media as an impetuous display of partisan strife, petty politics, and willful stubbornness, especially among Tea Party Republicans. But in reality the “fiscal cliff” was a boogieman trumped up by traders who needed a stock market prop and Washington politicians in thrall to the sundry Keynesian doctrines of tax-cutting and spending stimulus.
In truth, nearly every single item that constituted the fiscal cliff was a perfectly appropriate and rational fiscal policy action to reduce the $1.2 trillion federal deficit that persisted menacingly during the fourth year of a business recovery. As has been seen, the expiring $110 billion payroll tax abatement had been a stupid idea from the beginning, and the $300 billion Bush tax cuts for everyone had been unaffordable for more than a decade.
Likewise, the alternative minimum tax rise of $125 billion was only going to hit households which for years had not been paying their fair share of taxes due to loopholes. Most especially, the pending automatic 8 percent cut (sequester) of defense spending was a no-brainer relative to the insane explosion of defense spending from $300 billion under Clinton to $700 billion at present.
Ironically, therefore, there was good reason for Washington’s inertia and its inability to fashion a consensus to avert the cliff. The clownish action of the Senate in the wee hours of New Year’s morning in enacting a pork-dripping Christmas tree of tax giveaways was an outrage not because of the manner in which it was done, but because it was done at all.
In truth, with the awful specter of “peak debt” lurking around the corner, the $650 billion per year of spending cuts and revenue increases should have been permitted to go forward because they constituted a rare instance in which meaningful long-term deficit reduction could have been obtained without need for legislative action and the impossible, labored maneuvering required to achieve majorities in our current fractured system. In fact, Washington blew an opportunity to sit on its hands while enabling a permanent $4.6 trillion 10-year shrinkage of the deficit, a meaningful downpayment on the urgently needed return to fiscal sobriety. And it could have been done politically. The wild arm-waving about the fiscal cliff that animated Washington and financial TV did not have much resonance with the Main Street electorate; the unwashed public was more or less resigned to taking its lumps.
By contrast, there can be little doubt that the near hysteria was fomented by Wall Street and its organs and shills in financial TV. After decades of getting its way, Wall Street simply presumed it was entitled to any and all actions by Washington that might avert a recession and thereby keep the stock averages high and the “risk-on” trades prospering.
At the same time, official Washington did not have to be coaxed into doing Wall Street’s bidding. K Street was automatically mobilized to defend its tax goodies and DOD contracts. Likewise, the ranks of elected politicians were prepared to bang the deficit lever hard, having received decades of house-training on the notion that the US economy should be propped up with fiscal “stimulus” whenever it “underperformed” its full employment potential.
As a practical matter, economic “underperformance” was taken by GOP tax cutters and liberal spenders alike to mean GDP growth of under 3 percent and unemployment over 6 percent. Since the reality of the American economy fell far short of those vestigial benchmarks, politicians reflexively insisted that the state continue to dispense what amounts to economic waste (e.g., unnecessary defense spending) and unaffordable gifts to the middle class (i.e., the Bush tax cuts) so that the private sector could spend and consume beyond its means; that is, avoid a recession that is inevitable because fiscal retrenchment is unavoidable.
It thus happened that needing to avoid a collision with peak debt, Washington kept racing straight toward it, desperately searching for a political consensus to ensure that Uncle Sam would incur a trillion-dollar deficit for the fifth year in a row. Indeed, the definition of enlightened and courageous policy action had taken on a perverse aspect: statesmanship now consisted of cancelling any and all previously enacted policy measures which would cause too little red ink.
The symbiosis between Wall Street’s petulant Cramerites and Washington’s champions of Keynesian tax and spending medications thus came to a flailing and twisted estate. Their bedraggled charge up the $650 billion “fiscal cliff” on behalf of more red ink was in reality a noisy and incoherent repudiation of the very tax increases and spending cuts which they had put into law only a few years earlier to reduce that very same budget deficit. Washington was now not only ensnared in a circular process that would inexorably intensify, but was also slipping into a fatal corruption of the policy discourse that would make fiscal governance increasingly impossible.
The fiscal cliff coverage by the Reuters news service, an unembarrassed megaphone of Wall Street’s “recovery” delusions, illustrates the growing incoherence of the fiscal narrative. A news story on the eve of the cliff condemned lawmakers for failing to reach a compromise “to avoid the harsh tax increases and government spending cuts scheduled for January 1.”
Harsh? The implication was that the foundation of the US economy was just fine, and that borrowing another $1.2 trillion to keep the party going another fiscal year was a no-brainer. All that was needed was for the politicians to summon sufficient courage to uncork some more red ink.
Accordingly, there was not a hint of recognition that 2013 would mark months forty-two through fifty-four of the National Bureau of
Economic Research–defined recovery cycle, and that since 1945 the average expansion had lasted only forty-five months. Even a few years earlier, the Keynesian doctors would have recommended weaning the patient from its fiscal ventilator at this late point in the cycle.
In fact, these pending “harsh” fiscal contraction measures were not some gratuitous roadblock that had been erected by enemies or aliens; that is, arbitrary impediments to the American economy’s divine right to permanent prosperity, even if borrowed. Instead, they embodied the trap left by years of national fiscal cheating on a grand scale; that is, Washington’s pretense that just one more year of fiscal freeloading would be enough to put the American economy back on the road to self-sustaining growth.
THE NEW NORMAL AND THE NEED TO WEAN THE US ECONOMY FROM ITS FISCAL VENTILATOR
As has been seen, that was a terrible delusion. The American economy had been steadily weakening year in and year out since the turn of the century. As indicated, during the past twelve years real GDP growth has averaged an anemic 1.7 percent; there has been zero net new payroll jobs; and the very best gauge of future economic growth prospects—real business investment in plant, equipment and technology—has expanded a barely measurable rate of 0.8 percent annually.
This is the new normal; it is not a temporary fluke or a transient condition related to sunspot cycles. It most certainly does not betray inadequate application of Keynesian tax-cutting and spending medications. Instead, it reflects an economy that has been stunted by the massive debt overhang thirty years in the making and the vast structural damage that resulted from this national LBO equivalent; that is, the offshoring of tradable goods production, the inflation of domestic costs and wages from borrowing $8 trillion from the rest of the world, and the busted investments strewn around the US economic landscape in commercial real estate, retailing, and lodging and leisure, among others.
The Great Deformation Page 93