Saturday, January 5, 2013

Why the Cliff was not our Thelma and Louise Moment

When Thelma and Louise went off that cliff there wasn’t any question what happened to them. There were questions, like “Why?” but not, “What?”

In that sense this is no cliff.

It is a speed bump. If we hit it too fast it will cause damage but it will not kill us or the country.

A speed bump is supposed to slow you down and our fiscal path is wrong and we are far too fast headed for far too much debt. This speed bump was supposed to slow our descent and give us time to map a new path at a safe speed.

It hasn’t worked out that way has it?

Put partisanship aside. The politicians placed this crucial speed bump too close to a flat out trap putting it after THEIR election and leaving little time for its issues to be dealt with and then to be handled in a lame-duck session at that. The bump was placed there for their convenience and now they are incapable of dealing with its demands. 

This is selfishness; it is the only bipartisan act I can detect so far.

Put aside the public opinion polls: Boehner is being vilified because he has an unruly faction to try to corral.  The President, from whom we might have expected some leadership, got the ball rolling by asking for the bump to be smoothed by given him the things HE wanted.
The President’s leadership
Obama claimed a mandate. Let’s look at this. He was elected with a popular vote margin that exceeded the margins of victory in 23 historic presidential elections but fell short of the margins in 26. His electoral vote count was large, but by popular vote he was only re-elected by a modest margin. The voter turnout was a disappointment meaning he did not inspire people to vote. Compared to his first term he has lost his mojo. His only mandate that I can see is to do his job just like the mandate for the Senate and House members.  Since no one party is in power, the situation calls for compromise. That is the only mandate and both sides are resisting it.

Obama’s saying he had a mandate for his views was sham. Calling for capitulation by Republicans was brash and over-stepped the bounds of reality. The President got this ball rolling down the wrong side of the hill. Now it’s way too hard to get it back and to start again.

The Republicans took up the President’s ‘challenge’ and asserted that THEY had a mandate too; a mandate from their constituents not to raise taxes and suddenly there we were right smack dab in the middle of political grid lock.

We are right where the President led us.

So he may get good grades and maybe it is the 47% talking, but who in America realizes that this tangled ball of string is of the President’s doing? Harry Reid’s saying Social Security was off the table did not help either. After the elections Boehner did say that ObamaCare was now the law of the land. Republicans were not obstreperous. Yet the view seemed to be that the Republicans were supposed to roll over like a submissive dog and show their belly to the sharp Democrat teeth and give in.

They have not done that and for that they are vilified?

How did that happen?

Don’t Americans realize that putting a greater burden on the 53% that pay Federal Income Taxes (FIT) is not a solution but only an expedient? Interestingly even in France the mantra of ‘tax the rich’ is running into trouble. French courts have thrown OUT the 75% top rate change that socialist Hollande instituted calling it unfair.  Even France has fairness rules

The Real Solution
The real solution is to get incomes UP so the ranks of the 47% will shrink. If America is not a land of opportunity then it is nothing. Without opportunity there will be no freedom. People have to be able to afford their freedom. Freedom has a decided - if somewhat oblique - economic element. America is not a land of equal outcomes as the President seems to be trying to make it (that by the way is socialism/communism etc: from each according to his ability, to each according to his ‘need’). But it has not been a land of equal opportunity either and that is what must be fixed more than to arrange handouts designated by income cohort.

Inequality of outcome is a great motivator. Equality of opportunity is what makes unequal outcomes ‘fair.’

And there we are.

I do not see these principles being reflected in our political debate. What I see is each party taking America’s flaws and trying to make them the result of the other side’s ideology. There is no sense of looking at our problems and trying to create some short term help while putting the economy on a more sustainable long term path with improved opportunity. There is ideology, gamesmanship, and political posturing to try and make the ‘other side’ seem responsible when things go awry.

Democrats are winning this game largely because the press REALLY IS so liberal. By any objective measure what is most wrong with the economy looking into the future is spending - way too much spending- it will consume a growing share of GDP as we look into the future and evaluate the responsibilities of government under our current array of promises. The tax revenue shortfall is a product of a lingering recession.

Class warfare is not the solution. But Obama and the Democrats have found a discordant note that the press has echoed and Republicans have been unable get a fair hearing although they really occupy the high ground in this debate. They have ‘cleverly’ fumbled the ball by making their pledge of ‘’no tax rate hikes’ the center piece of their debate instead of focusing on excessive government spending and promises.

Obama is making Republicans look bad by offering to shave the cliff by giving them everything HE wants and nothing THEY want AND because the middle class also wants these things. Obama’s power grab makes Republicans look bad. But bargaining is a two-way street not the one way street that the President would make it.

Another way to think about government spending
The more of our GDP that will require tax revenue that is going to be spent on government programs be they military spending, Medicare, Medicaid, ObamaCare, Social Security, or whatever, the less if left over to finance the America that used to be characterized as rugged individualism. That means the less choice and the less freedom we all will have since each family will retain less of its income.

Obama is from Illinois. It is an extremely indebted state. We should guard against him wanting to impose on the nation what has been his own experience in Illinois. Illinois is no role model. Democrats there that have controlled that state have not turned it a model we should emulate. Illinois has the fourth-highest debt in the nation, with liabilities totaling $271 billion. Only California, New York and Texas are carrying more debt.

But this situation is not just about starry-eyed tax hike loving (even if P-R savvy) Democrats. Republicans should realize that the nation has been much more prosperous even with higher tax rates. Democrats need to realize that the tax system and its network of deductions work together. Fairness is an issue here. Even France has overstepped its own liberal socialistic bounds in simply soaking the rich as its courts have rescinded the 75% top marginal rate branding it as unfair. Counties with much higher progressive tax rates than ours are countries that are socialistic and that do not espouse a doctrine of unequal outcomes. This is not and never has been America. America has always been the land of opportunity. The trick is to make opportunity more equal.

If we are transitioning to a more socialistic country we should find a way to get a consensus. This sneak attack of socialism is a bit like what the EMU is doing by changing its provisions bit by bit and never letting the people vote on what the leaders (leaders?) are doing.  If, however, the desire for more transfer payments is a result of our horrific recession and our inability to get the economy on track and is more the result of temporarily reduced tax receipts, we would not want our temporary situation to send the economy permanently down a path it will soon regret.

The real nature of the Cliff debate:
Yet none of this is part of the national discussion. It is all Hatfields Vs McCoys and there is no discussion just a lot of shootin’... mostly each side shootin’ its mouth off: Mouth open! Ears shut! Mind Closed!  Ready! Set! Go!

We can look back and see things that are wrong or at least that have turned out wrong. While thousands were prosecuted in the 1980s after the S&L crisis only two (not two-thousand only TWO PEOPLE!) have been indicted in this financial crisis and they got off scot-free. And this was a much more damaging financial crisis. Let’s remember that Obama runs the Justice Department! He is President! Justice reports to him!  If you like to call ‘bankers’ ‘banksters’ Obama is the guy who has NOT prosecuted them (has not directed the Justice Department to prosecute them). Yet the anti-Wall Street crowd is also anti-Republican and anti-1%. It’s all very curious, isn’t it? 

They used to talk about President Reagan as the Teflon™ president. Obama is at least as lucky.

What’s really wrong (not class warfare)
Both Republican and Democrat administrations have been happy to sit by and watch our international (current account) deficit plunge into larger and larger red numbers. There is nothing remotely like free trade that would let this happen, yet both parties seem to be the in grips of multinational corporations that have used cheap foreign labor and the lack of foreign exchange rules to exploit that cheap labor abroad, keep it cheap, kill jobs and income at home while driving the middle class into poverty and busting unions. (Of course the government’s role in trying to get more people into houses they could not afford using Fannie Mae and Freddie Mac sort of speeded things up.)

Under any reasonable market-determined exchange rate regime the US would not have been able to run such increasing deficits. Academics would tell you that this economic result is not one predicted under a free-float model of exchange rate determination. America did not run persistent and expanding deficits to finance investment but to finance consumption! Under a gold standard the US would have staunched its deficits along ago under the pain of gold transfers from the US to China and to other persistently surplus countries to settle its deficit accounts. That would have proved too painful to endure.

Anyone that does not admit that China’s development has not been at the cost of the US is just not paying attention. Why does the country with more ‘poor’ people than any other place on the face of the earth have over $3trillion in foreign exchange reserves? Couldn’t it find a use for that wealth? Yes it could, but since needs to buy dollars (and to accumulate FX reserves) to keep the dollar strong and the yuan weak so it can continue export to the US and keep its low labor costs and keep US firms investing more in China to exploit those low labor costs, it chooses to accumulate more ‘wealth.’

Over the years as China has developed it has suppressed its consumption, once up to 50% of GDP it has slipped back to 35% of GDP an extremely low level. Instead, of letting standards of living rise, China has restrained them. So China’s workers have worked their fingers to the bone for little gain while the ‘profits’ in this Communist country went to pile-up as FX reserves. Had China allowed more of a middle class to develop its imports would have risen and its wages would have risen and its need to grow by penetrating the US market would have been reduced. 

Instead, China did not let its currency adjust and did not set those forces in motion. And the end result was that it ‘lent’ more money to the US so we could go into debt to buy the things we wanted (from China) but we became uncompetitive and unable to pay our own way. Republican and Democrat administrations engineered this outcome.

So in the US we have developed a view of class warfare of rich against poor because that keeps us from looking at the real problem. It keeps Democrats and Republicans fighting one another. If keeps policy from looking at how the world trading system is siphoning off US wealth and making us all poorer and poorer so that even the rich feel the sting of their losses.

The middle class has been sacrificed to the multinational ambitions of US corporations by BOTH PARTIES! Now, we are out of touch with who we are and what we stand for. We are devolving into class warfare

In place of a national identity and real leadership we have a cartoon show run by a group of fools called Republicans and Idiots called Democrats and each squirts its seltzer bottle at the other one saying it is the problem. And no matter who we elect things get worse because no one is looking at the real issues.

Politicians are too focused on results (unequal outcomes!) and not enough focused on why the process has broken down.

And you thought the fiscal cliff was a big deal? The fiscal cliff is nothing. We are alive and not well and living in the Republican-Democrat view of THE MATRIX. We are the batteries that run their system. We exist for them; they do not serve us. Our model has become totally dysfunctional. No wonder we have turned to class warfare.

Is it too late to change it?