Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

19 August 2011

Mad Money Men Mayhem


[For what is now becoming almost routine on this blog—near immediate confirmation from the mainstream media—click here.]

Yesterday’s market meltdown was a surprise even to me. Take Exxon Mobil Corporation (XOM), for example. It dived 4.34%. Its price-earnings ratio is now 9.32, or a bit more than half of the long-term average for good industrial companies. And there’s no telling where it will be today or tomorrow.

XOM makes products (oil, gas and gasoline) that the world needs to run. Fabrication and use of things that burn those products—cars, trucks and the roads to take them—are exploding globally. So demand is ever-rising. And supply is limited and (for oil) declining.

As I’ve noted repeatedly on this blog, oil and its products have high inelasticity of both demand and supply. So according to classical economics, the price of oil and gasoline (and eventually naturally gas) will rise inexorably, barring a double-dip recession or another Great Depression.

Now here’s the thing. Take a company that makes the most important products in the world: those that make everything else run. Admit that, despite its occasional climate-change denial and its mindlessly selfish political lobbying, it’s very good at what it does: drilling for fossil fuels. In fact, it’s the best firm of its kind in the world. Understand that its main products will (again, barring recession or depression) increase in price for the foreseeable future without any extraordinary effort or investment on its part.

So basic economics almost guarantees XOM ever-increasing revenue and profits, even in the face of declining output, for the foreseeable future. Sounds like as much of a sure thing as the investment world ever offers, doesn’t it? Yet its stock went down some 16% in the last three weeks.

And XOM is not alone. Apart from our military, American institutions may be failing in almost every respect. But not our excellent companies. We still have a lot of them, and they are among the best in the world.

I call them the “ABCs,” for Apple, Boeing and Caterpillar. If you think hard enough, you can find one for almost every letter of the English alphabet. (Disney, Exxon Mobil, Ford, Google, etc.) They make products that are unique, like Apple’s iPad or Boeing’s hyper-efficient Dreamliner. Or their products or services may have competition but are the best in their class.

These firms operate worldwide. So they aren’t dependent on any one nation, region or political system for revenue or profit. They get a large share of their business from abroad. So they are at least a little immune from the political extortion and nonsense of our Tea Mob and its “leaders,” who fortunately don’t have global jurisdiction. And with huge hoards of cash from their extraordinary earnings, and their recent ability to exploit ultra-low interest rates, they have the strongest balance sheets in the history of industry.

So what’s not to like? That’s why stockbrokers and Wall Street, like mad marketers, keep advising everyone to “buy now,” while prices are low. That’s why even Warren Buffet is buying.

But prices keep going down. And a few voices even from normally manic Wall Street are beginning to say the rout could go on for some time. What gives?

What gives is finance. The mad money men have the whole world in thrall. They are out of control and have been for at least a decade. And no one—not governments, not all those excellent non-financial ABC companies, and not the money men themselves—knows how to bring things back into balance again.

On this blog I’ve made much (1 and 2) of a simple “vital statistic.” A few years before the Crash of 2008, the finance sector’s share of all US business profits reached 41%.

That’s an extraordinary number. It’s utterly pathological. What it means is that, with all those excellent ABC companies doing things other than shuffling paper, finance was the 800-pound gorilla.

And it still is. After all the turmoil, volatility and angst of the last four years, that horrible vital statistic is probably still about the same. It may even be higher. We haven’t even begun to cut finance down to size.

And how could we? The whole purpose of the gigantic bailouts of the last four years was to keep finance alive, in its current form, and therefore hideously bloated. The three-quarters of a trillion dollars of TARP was just the tip of the iceberg. There were also several more trillions invested directly in the finance sector’s toxic assets and in QE1 and QE2, which inflated our money supply by giving the finance sector essentially free loans while our people, governments and industry tightened their belts.

Now don’t get me wrong. Like most thinking voters, I supported these measures initially, as the best of bad alternatives. Stop the whole house of cards from collapsing now, I thought, and we can sort out accountability and reform later.

But accountability and reform never came. No stupid or greedy banker has gone to jail. (Bernie Madoff was just an old-fashioned crook, a sideshow to the main event. He had nothing to do with the Crash of 2008 except the coincidence of timing and misplaced trust.) None has even taken a well-deserved loss. And reform has foundered on the rocks of intense lobbying, the opposition of idiots like Richard Shelby of Alabama, the immensely counterproductive silencing of Sheila Bair and Elizabeth Warren, and the myriad details of enacting regulations.

And it gets worse. There is no evidence—none whatsoever—that accountability or reform will come to the finance sector in the foreseeable future. The culprits have not only got off scot free; they still run the store.

And why should accountability or reform come? The mad money men (they are all men: women like Shiela Bair and Elizabeth Warren tried to stop them but so far have failed) still have their grossly excessive compensation and obscene bonuses. They still have their private jets. They still have their pathological $600 trillion worth of derivatives (no, that’s not a typo), entirely outside the control of government regulators worldwide. They still have their high-frequency trading computers, which trade faster than any conceivable development in real industry and caused the Flash Crash of May 2010.

But most of all, they still have this country by the balls. As I have pointed out, the mad money men of Manhattan control this country completely. They have Congress in their pockets, or at least powerful bossists like Shelby. They have the Supreme Court on their side. They control our national media, which are all in Manhattan and depend on finance. They have infiltrated the administration of the most competent and aware president in three decades. And, because he needs their campaign money to fight the most extortionist, scorched-earth nihilism since the Civil War, they have his ear.

What’s new in the last month is that the same story is unfolding in Europe. The EU’s economic engines, Germany and France, briefly considered a partial default in the bonds of tiny Greece. That default would have given the banks that invested in those bonds unwisely a bit of a “haircut”—really, just extended maturities. But that proposal lasted only a few days before the overwhelming power of global finance killed it.

The banks, say our real rulers, must be served. None must lose money, lest the whole debt house of cards collapse. Even tiny Greece can’t be rescued by a mere partial default, they say, because default might follow in Ireland, Portugal, Spain or France itself. And governments from Berlin to Paris, from Brussels to Madrid, salute and obey.

And who are these unelected rulers? The same mad money men who created the problem in the first place. They are the same men who profited from their folly in the Crash of 2008 and now stand to profit from their folly of allowing country after country in the EU to come close to insolvency without (until recently) a precipitous rise in interest rates or anything close to default.

The problem is easy to state but devilishly hard to solve. The entire global finance sector has become “too big to fail.” It therefore has become our de facto (and utterly undemocratic) global ruler.

That’s true not just here at home, but in Europe and Japan as well. With the possible exception of Russia, China is the only nation on our planet that has practical control over its financial sector and any hope of preventing the explosion of gambling and swindling that has overwhelmed the otherwise healthy global economy.

So we have several undeniable and ugly facts. First, the mad money men rule. They rule everywhere but China, and even China can’t curtail their global power. Second, they have forged a bloated empire of gambling and swindling, of which shaky sovereign bonds are just a small part. Third, that empire, like a cancerous tumor, has metastasized into the US economy, sucking away the lifeblood of 41% of all US business profits. It is now draining the life away from all those excellent ABC companies by depriving them of customers. And finally, no one in authority has the faintest idea how to stop the mad money men from plunging us into a second global depression by sheer inertia and inaction.

All this the public dimly recognizes. The fact that bank bailouts left ordinary people to take the fall is still one of the chief drivers of the Tea Mob and Republican extremism here at home and the riots in Greece and now England abroad. But right-wing propaganda has perverted that understandable and well-justified outrage into precisely the wrong prescription: destroy government and give the mad money men yet more power.

The consequences are equally apparent. No rational person can have any confidence in a system ruled by gamblers and swindlers, where they make the rules under which they continually prosper, while the excellent ABCs lose customers and opportunities, sovereigns fail, and ordinary people suffer for the sins of the ruling financial class. The recent riots in Britain, inarticulate as they were, are just a precursor of what’s to come.

The solution, of course, is obvious. The misbehaving financial sector must be: (1) chastened and held fully accountable, (2) brought under rational control for the public benefit, and (3) downsized by a least a factor of three. In the US, the downsizing would best be by a factor of four, from 41% down to something resembling the Biblical ratio of 10% interest.

Downsizing and subordinating finance is an absolute prerequisite for avoiding another crash and a second Great Depression. But that downsizing itself will not be without pain. Legions of uneducated and barely literate traders, brokers, tellers and call-center zombies will lose their jobs. A recent report of 101,000 jobs to be lost in global finance should be just the beginning. Having all those unemployed and otherwise unemployable people out on the streets will just make the labor market worse.

But job one is not really jobs. Job one is downsizing and controlling the global finance sector. The job market cannot recover while madmen rule and otherwise unemployable people suck resources and attention away from real industry. Unless we drastically downsize global finance, the tumor will continue to grow, and the patient—our global capitalistic economy—will wither and die. Perhaps something better will rise from its deathbed, just as Bretton Woods and the WTO arose from the catastrophe of World War II.

But economic collapse, with the possibility of major war in consequence, are not real solutions. They are abdication. In my next essay, I will propose some solutions that, albeit radical, might restore economic balance without a general global collapse.

Absent some such solution, the markets’ free fall will continue without foreseeable end. For the free fall reflects a well-justified crisis of confidence. No one can trust a system run by greedy, stupid people whose only “value” is short-term self-interest and who nearly destroyed the same system a mere four years ago.

Rational people, including ordinary folk and business people outside finance, now see dimly what has undone their confidence. And neither their confidence nor the markets will recover until something real is done to bring back real industry and global government by the people, not the same bankers who twice brought us to our knees.

Quick Confirmation

Three days after the foregoing post appeared, Bloomberg.com published a review of US bailouts, essentially confirming the foregoing analysis. The headline says it all: “Wall Street Aristocracy Got $1.2 Trillion From Fed.”

That’s the conclusion from Bloomberg.com’s analysis of “29,346 pages of documents obtained under the Freedom of Information Act” and government databases, many of which were kept secret for two years after 2007 and 2008. Bloomberg.com also reports that the amount “invested” by our government in the survival of financial corporations and their plutocratic masters was “about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages.”

The Bloomberg.com report confirms what many (including me) heretofore only suspected: that a substantial portion of the Fed bailout went to foreign-owned financial institutions whose fate the Fed believed to be intertwined with domestic ones. This was a global crisis, with a global bailout (by our own central bank and others), which is still ongoing.

And central banks worldwide, including our own, chose to save the global economy by saving the institutions and people who had created the crisis, rather than its innocent victims. If was as if FDR’s administration had chosen to guarantee the prices of bank stocks, rather than depositors’ savings.

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13 August 2011

The Traps our Founders Foresaw (that We Fell In)

Our Constitution: Not Scripture, an Imperfect Document
The Evils of Direct Democracy
Our Lost Republic
Can We Get It Back?

Our Constitution: Not Scripture, an Imperfect Document

Readers of this blog know I am not as starry-eyed about our Constitution as most of us profess to be. (See 1, 2, 3, 4, 5 and 6). As scripture, it has flaws that are becoming self-evident. Apart from the Bill of Rights, which our Founders added only as an afterthought, it is no longer a good blueprint for successful government in the twenty-first century. And even the Bill of Rights has an ambiguous Second Amendment that allowed our Supreme Court to turn us into an armed camp.

The body of our Constitution—its blueprint for our government—has several serious flaws. First and foremost, it gives us no way to remove a failing president short of proving a crime, beyond a reasonable doubt, through an elaborate legal procedure. There is no way to remove a bad leader for simple incompetence, stupidity or bad policy. Most other modern democracies can do so with a simple vote of “no confidence.” They needn’t suffer the distraction of legal mumbo-jumbo that made removing Nixon so difficult and trying to remove Bill Clinton such a farce.

Close on our impeachment process’ heels in dysfunctionality is the Great Compromise. That expedient, perhaps necessary when made, now gives tiny Wyoming the same number of senators as California, with over 65 times the population and more than 50 times the GDP.

But the crowing ignominy is our Senate’s rules. Our filibuster now imposes minority rule on our nation. Any 41% minority in the Senate can block legislation that a 59% majority wants. The minority doesn’t even have to talk itself hoarse any more, but can “just say no.”

The worst rule of all is the “courtesy” rule for Senate holds. Under this rule, any senator, from any state, no matter how small or backward, can put an indefinite hold on any legislation or presidential appointment, for any reason or for no reason, and often secretly and anonymously. This “courtesy” that senators have extended each other has had predictable consequences. It has destroyed representative democracy, promoted gridlock, and led to an epidemic of extortion.

Sen. Shelby’s current 70 holds on presidential appointments are only the tip of the iceberg. The halls of our courts and executive departments are far too empty because of these appointment blocks.

Our Founders were brilliant men and realists. They understood the lure and dangers of unchecked power. But when they gave each House of Congress the power to make its own rules, they failed to foresee the danger. They didn’t stop the Senate from giving its own individual members near-absolute power to subvert democracy and the nation’s welfare for their own and their constituents’ narrow advantage.

Unfortunately, there is no going back now. Once states, districts or pols assume it, they never relinquish power voluntarily. So we are as unlikely to undo our disastrous Senate “hold” rule as we are to undo the Great Compromise, which our Constitution specifically and explicitly perpetuates. Changing the Senate rules takes even more than overcoming a filibuster; it takes a two-thirds vote.

The Evils of Direct Democracy

So did our Founders do anything right? They did indeed, but we have already overthrown their most important contribution.

When Ben Franklin emerged from our concluding constitutional convention, legend says that a woman asked him what kind of government we would have. “A Republic, ma’am,” Franklin famously answered, “if you can keep it.”

When Franklin said “Republic,” he meant a representative democracy. Thomas Jefferson and others had argued for direct democracy, like ancient Greece’s—one in which every citizen participates directly in civic decisions. But the Founders rejected that system as impractical. The chose instead a system in which the people vote for representatives, and the representatives govern.

The reasons for this choice are explained in records of the debates and in the Federalist Papers. They made and still make a lot of sense.

Representatives provide a “buffer” between the people’s passions and desires and the needs of the nation as a whole. The Founders thought that representatives, being fewer in number and wiser in political experience, would compromise and make sensible deals when the people in their masses and passions could not. The Founders also feared the evils of “faction” (i.e., partisanship) and hoped that the wisdom and experience of representatives, acquired over time, would soften if not contain them.

While our Founders were nearly all part-time pols, except when serving as president, they implicitly foresaw the rise of a political class. They hoped that the experience of governing—and of repeatedly compromising to do so—would make representatives wiser, more prudent and more conscious of the whole nation’s welfare than the voters whom they represent.

Our Lost Republic

It takes no more than a moment’s thought to see that all their foresight has gone almost entirely by the boards today. The recent impasse on raising the debt ceiling exemplifies Congress’ difficulty in compromising on any real issue. And as the House Freshmen slavishly follow the extreme demands of their Tea Mobs, pledging fealty to Grover Norquist above their oaths of office, they illustrate dramatically how “representatives” today neither lead nor compromise. They follow.

It was not ever thus. Well into my own adulthood, key members of Congress resolved vital issues in smoke-filled back rooms, in secret, without cameras or news media. One of the greatest leaders of that era was Lyndon Johnson. He twisted congressional arms to pass the Civil Rights Act of 1964, barely two years after popular governor George Wallace (of Alabama, natch!) had, in his inaugural address, proclaimed, “segregation today . . . segregation tomorrow . . . segregation forever.” That was back-room dealing: getting civil-rights laws enacted with massive Southern support at a time of widespread Southern racism!

But those days are long gone. Why? There are many reasons.

Perhaps the most important was the change from party nomination to direct primaries. In the old days (Not so old: I remember them well!), party caucuses chose candidates for important offices—or a short list of nominees for caucus selection. The means were meetings of leaders in more smoke-filled rooms. That was true representative democracy. The hoi palloi, with their prejudices and passions, were excluded.

Inside those smoke-filled rooms, experienced, hardened, capable and quintessentially practical pols evaluated contenders’ chances to advance the party’s and the nation’s welfare. They knew the candidates personally, thorough years of close interaction. So they could evaluate such intangible qualities as mental acuity, knowledge, toughness, flexibility, personal integrity, and diplomacy. They didn’t have to rely, like voters today, on sound bites and lies prepared by political consultants or advertisers to push voters’ buttons.

Those rooms were not only filled with smoke. They were filled with experienced, serious, practical people with serious objectives. These folks would no more pick a candidate for a stand on issues like abortion, gay marriage, or gun control than they would base their decision on what sort of liquor a candidate preferred. People like Sarah Palin, Michelle Bachmann, and the Pauls (Ron and Rand) not only would not have been put forward as candidates. They wouldn’t even have been in the room.

Our direct primaries have taken us a long way down the road to the very thing our Founders rejected: direct democracy. They have opened us up to the worst sort of demagoguery, which excites popular passions but has nothing to do with any real issues. While they may seem more “democratic” in the abstract, direct primaries have realized our Founders’ worst fears of “faction” and thwarted their intention of giving us a representative democracy. In retrospect, they seem a big mistake.

Not only does our direct-primary system thwart the type of Republic that our Founders wanted. Our hungry and mostly yellow news media seek to expose any secret, any flaw, any misstep, and any misstatement, however accidental or deliberately misconstrued. Thus they discourage our pols from private bargaining, even from being human, whether to socialize with the opposition or to speak informally off the record.

The result is a public persona like John Boehner’s, which strives with fanatic zeal to stay “on message,” or one like Mitch McConnell’s, which gives the impression that Versed is his drug of choice. Neither ever says anything that might be construed as spontaneous, or that can’t be encapsulated in bumper-sticker slogans like “job-killing taxes” and “too much debt.”

John Boehner’s public persona is easy to disparage. (See 1, 2, and 3). But he cannot be as bad in person as his public persona. He must have something going for him to have been elected Speaker of the House and to have nearly cut a deal with the President for $4 trillion in debt reduction. But we out here in voterland never get to see that side of Boehner, who must maintain a facade of absolute right-wing orthodoxy in order not to suffer a primary challenge from the right in his own party.

There are, of course, many other reasons for our sad state today besides direct primaries. We have gerrymandered districts that are “safe” for 80% or 90% of the members of Congress, regardless of their party or the party in power. Lacking competition—the lifeblood of any democracy or economy—these districts collapse into solipsistic, hyper-partisan shells, bringing the Founders’ nightmare of “faction” to life.

And our media not only magnify every slight misstep and misspeaking. They also seek out and magnify every possible conflict, no matter how trivial, in their quest to sell “news.” Thus our media and our demagogues become mutually reinforcing handmaidens to our national apocalypse.

Can We Get It Back?

Can we go back to the better days of smoke-filled rooms? I don’t think so. You can’t take back a constitutional promise to give each state two senators forever. You can’t take back a rule permitting Senate holds, because it magnifies each senator’s power. You would need to find 67 senators wise and strong enough to relinquish their power for the good of the nation, just as George Washington refused a third term. Good luck with that today!

Just so, you can’t take back direct primaries because: (1) they seem more “democratic;” (2) we’re used to them now; (3) whole industries of media, pundits, consultants and analysts have attached themselves to direct primaries like barnacles; and (4) voters cannot sustain interest in anything “procedural.”

So if we can’t go back, can we move forward?

I can see at least three ways. First and foremost is giving the public accurate information. A few days ago, when the President made his television plea to avoid default and Boehner responded, people listened. What the principals had to say suddenly became more important than the talking heads’ blather and the incessant drivel from our multiple partisan echo chambers.

We need more of that.

We need more communication, not less. Once a week, the President and the majority and minority leaders of the House and Senate should have a half-hour or hour-long televised debate, in free form. To suppress demagoguery, they should be required to look forward, not back, and to propose solutions to problems and explain how they would work. A neutral moderator, chosen by mutual consent, should enforce that rule and should be required to correct factual inaccuracies on the spot, or in the next broadcast, to keep the speakers honest.

The second possible solution is to give political-party leaders more say in primaries. We can’t go back to having them name nominees, or even short lists. But maybe we can have them disqualify candidates for extremism or inadequate qualifications, including lack of experience, knowledge, intelligence, flexibility, and diplomacy.

If even that’s too much, maybe party leaders can take a more active role earlier in the nomination process. Maybe they could publicize their recommendations and/or disqualifications early enough and often enough to avoid entrenching unsuitable candidates (and their donors). We did pretty well as a nation when we relied on the experience and cumulative wisdom of our party leaders; we need to think about how we can do that again.

The final thing we might do is change how our media operate. Our media have played a key role in destroying our public life by broadcasting lies and mistakes with glee and zeal because they are “news.” In this sad situation, Murdoch’s Evil Empire is not alone.

We cannot restore any real democracy, let alone rational representative democracy, until we get our media under control. In order to elect representatives wisely, the people must have accurate information, free of distractions. Our First Amendment precludes dictating content, of course, but does it preclude dictating balance?

Until Reagan’s FCC repealed it, we had a “fairness doctrine” for broadcast media. That rule required any medium airing a political attack to air a response from the person attacked, and for free.

That rule had two salubrious effects. First, it forced the same sort of audience that heard the attack to listen to a response. Second, the prospect of having to donate free air time to victims of political attacks made media owners circumspect about making them. If we had that rule in effect today, for example, it might bankrupt Fox. It certainly would make it more “fair and balanced.”

Our Supreme Court upheld the fairness doctrine as consistent with our First Amendment in the Red Lion case. There it relied primarily on two factors. First, the “spectrum scarcity” for broadcast stations limited their number and thus required regulation, lest a few owners monopolize the airways and subject the “truth” to their command. Second, the federal government had controlled and licensed over-the-air broadcasting since its early days, so regulation of fairness seemed unremarkable.

Since that time, new technology and new business models have eliminated spectrum scarcity. They have created a huge cacophony of voices, over cable and the Internet, as well as the open air. At the same time, the privatization of much of our communications infrastructure has obviated the “already regulated” argument. In addition, antipathy to government regulation may have grown to such an extent as to make a new fairness doctrine politically untenable as such.

But government still participates substantially in communications, including satellite monitoring and licensing and aspects of the Internet’s infrastructure. Maybe government can assert its leverage in these backbones as justification for a new “fairness doctrine“ limited to communications that use them. If not, then maybe government can create an “official” channel, with broadcast and cable ubiquity, in which government officials and party leaders can reply, on a regular basis, to attacks and claims made about them. This channel might also have a nonpartisan fact-checker explore to debunk the more extreme claims made on the political trail.

These ideas are just a first crack at the problem. We need much more and deeper thinking about what ought to be done. But think and act we must.

We have already lost our “Republic” as our Founders understood it. It is now a direct democracy masquerading as a representative democracy. So we have fallen prey to precisely the evils of popular passion, demagoguery, and faction that our Founders feared most.

We can’t do much about the flaws in our Constitution: inability to remove a president without a trial for crimes, or a Senate that gives a small minority the power to stop national policy dead in its tracks. We can’t even do much about our horrible Senate rules, which invite each senator to become an extortionist. But we can change the way we select and support candidates for elective office.

With changes in nominating and media customs, perhaps we can find some way to restore some of the representative Republic that our Founders thought they gave us, and that we seem already to have lost. If not, we can watch our nation, our economy and our way of life sunset as others pass us by.

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04 August 2011

The Leader Falls


At first glance, the markets’ plunge is puzzling. The extortionists didn’t shoot the hostage, did they? Isn’t that reason for another burst of irrational exuberance?

As is turns out, no. There’s not much irrational exuberance left, anywhere in the world, even in the thriving BRIC nations. There are only confusion and fear.

One thing “quants” never seem to ken is that markets are as psychological as they are logical. At the end of the day, they are just big collections of people.

Unlike machines or mathematics, people internalize self-evident changes at their own individual rates. But once their collective realizations reach critical mass, watch out! That’s what causes revolutions.

So what’s the change that’s now self-evident to a critical mass of global investors? It’s simple to say but profoundly important. The global leader for the last century is beginning to disappear, retreating into a shell of isolation, self-righteousness and madness.

The best evidence came in a marvelous graphic that the New York Times had on its online “front page” early yesterday but apparently since took down. It showed the day’s progress on all the world’s major stock markets in a single interactive plot. Click on tabs, and you could see the three-percent-plus plunge on every one.

What the graphic didn’t show—comparative timing—should be obvious. The sun rises in the East. So the market collapse started in Asia and the Pacific, migrated to Europe and got here only last. The collapse was the rest of the world looking at us.

And what did it see? It didn’t just see a nation about to enter a double dip.

The world saw a nation that had arrogantly started a war on false pretenses and then let it drag on for most of a decade for failure of commitment. It saw a nation that had declared war on a noun (“terror” or “terrorism”) without knowing who its enemy was, and so had gotten bogged down in the graveyard of empires. It saw a nation that had developed the idea of an all-volunteer army and then exploited that idea to abuse its troops and to fight two wars with no real plan. It saw a nation that, from a late start, had dominated the space race and put men on the Moon, but then meekly folded its extraterrestrial tent and ceded discovery to rising powers.

But most of all, the world saw a nation that no longer seemed a sound investment.

“Those whom the gods wish to destroy they first make mad.” Ignorant Americans may not have heard that ancient proverb, but Europeans have. They and other foreigners looked at us from a bemused and disinterested perspective. They were not under the evil spell of Fox. And they just didn’t like what they saw.

Here was a nation that had led the push for the World Bank and International Monetary Fund but wouldn’t follow the same advice that it and those institutions always gave others: lower your debt. While our politicians were heaving sighs of relief for avoiding self-inflicted economic Armageddon, foreigners were busy noticing that the $2.4 trillion of “agreed” debt reduction amounted to less than two-thirds of the interest on our national debt and anyway wasn’t really “agreed” at all.

The hypocrisy was bad enough. But the madness was even worse. Why couldn’t we get our debt under control as we have insisted others—including Europe—do for the last several decades? Because a lunatic fringe led by a bearded guru refused to raise taxes or close tax loopholes, even those that are self-evidently obsolete or counterproductive. Any why did this fringe and that guru find low taxes so important? Because they wanted to starve government and “drown it in a bathtub.”

Now it may come as a surprise to many Americans, but most foreigners like and respect their own governments. Certainly our most important trading partners do. The gods have spared them the spells that Saint Ronald and the Devil Murdoch cast upon our people. They want their governments to be strong because they conclude (rightly in most cases) that a strong government means a strong economy and a strong nation.

So, looking at us from abroad, foreigners simply concluded that we have gone nuts, and that they will have to seek a saner global leader and a better safe haven for their hard-earned cash.

That wasn’t all, of course. There was much, much more. The nation that had invented the light bulb, the phonograph, controllable aircraft, television, atomic weapons, nuclear power, high-altitude flight, cabin pressurization, the transistor, the digital computer, the laser, polio vaccine, lunar travel, AIDS drugs, the global positioning systems (GPS) and the Internet now thinks that Facebook and Twitter are the acme of innovation. The nation that had amazed the world with its manned and unmanned space exploits, its lunar landings, and the Shuttle was shutting up shop and walking away from the greatest-ever exploration of our species, which it had pioneered. And the nation that, from Kitty Hawk to GPS, had created this was stopping construction at all its airports to quibble about petty ideology. (I know, that problem has been solved, temporarily, but the fact that it happened at all is a sign of madness.)

This was the nation that had started and supported the League of Nations and the United Nations. This was the nation the had been instrumental in wiping smallpox off the face of the globe. This was the nation that supplied the weapons and materiel to win World War II and, without overreacting, had stood a 45-year vigil against the menace of Soviet Communism until the Russians came to their senses. This was the nation that rational foreigners always felt they could rely on as a safe haven for investment and a calm, reasoned hand in a storm.

No more. Perhaps the world could have excused one or more of these failings. Perhaps it could have excused several. But coming all together, all at the same time, these defects made us look like a geezer who has suffered a stroke or senile dementia. We are simply not the same America that foreigners once looked up to—sometimes with hope, sometimes with fear, and often with resentment—to solve the world’s problems when no one else could.

Now we can’t even solve our own. More than that, we can’t even approach our own problems with sober realism and reason.

So now it has become self-evident that we are no longer a suitable global leader. Yet no other nation has yet stepped up. China has the economic power, but it is self-centered and diffident, as always. It is at best a reluctant leader. And its recently-exposed program of massive cyberspying on governments and corporations worldwide makes people wonder whether it has the globe’s best interests at heart, even as a matter of enlightened self-interest.

Maybe you, like me, have an abiding fascination with ancient Rome. Maybe you sometimes wonder what the world felt like when its empire was falling apart. If so, don’t worry. You’re about to find out. The result might not be pretty.

Today Europe and the BRIC nations can advance the causes of science and technology and keep a lid on the more sinister aspects of religion. So what follows probably won’t resemble the millennium of Western stagnation during the Dark Ages. But it will be a time of great global uncertainty and doubt. And this plunge in the markets is just the beginning.

Footnote: The interest on our national debt this year will be $413 billion, or $4.13 trillion projected over ten years. [Erratum: an earlier version of this sentence omitted the words “The interest on.”]

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01 August 2011

The Deal

[For a brief comment on the imminent trial of Hosni Mubarak and his sons, click here.]

Now that the deal to avert national default is nearly complete, we can analyze its political consequences. They are not what they seem.

After reading Paul Krugman’s diatribe against the President, you would think the latter had sold out his principles, progressivism, and the nation. The overwhelming majority of the near-thousand comments on Krugman’s rant echo this sentiment.

That’s a good thing. The more Democrats wail and lament, the more Republicans will think they won, and the greater the chance the deal will go through. Already it has passed the House. It appears sure to pass the Senate, which is far more reasonable and was instrumental in negotiating it.

The worst thing would have been the GOP shooting the hostages, our credit and our economy. Not only would a national default have caused catastrophic economic consequences. It would also have produced cataclysmic political consequences. Like all guilty extortionists everywhere, the GOP would have increased their lying and obstructionism tenfold, in a futile attempt to disclaim guilt.

If you think the Tea Mob are crazy now, just think what they would be like if they had killed the hostages. They would have nothing further to lose. So although I would have supported the President in letting them cause a default and take the fall (see 1, 2, and 3), I’m very glad he didn’t.

The Republicans’ extortion has had an effect. The deal would not exist without it. And the public has paid so much attention to the entire process that the whole country knows who is responsible.

But the effect will be negative among all but the most extreme rabble. The first reason is economic. Serious economists are virtually unanimous that cutting government spending in the midst of a recession is a bad thing. Why? Because it reduces aggregate demand.

Government spending doesn’t just vanish into some black hole, as the GOP would have you believe. It pays the salaries of people employed by the government at the federal, state and local levels. It therefore allows them to keep their homes, send their kids to college, buy food, pay their mortgages and rent, and (if they have any money left over) buy cars, furniture, clothing, and other goods and services. In other words, the money the government spends increases aggregate demand for goods and services in the general economy, which increases GDP and boosts growth.

The good citizens of Minnesota recently got an experiential lesson in what happens when government stops spending. They didn’t like it at all. And they are all aware now that the GOP brought them that experiential lesson.

Despite this basic economic principle, the debt deal’s effect won’t be anywhere near as catastrophic as a default would have been. The reason is timing. As Nate Silver explained in the New York Times—the best analysis I have read on the subject—the deal’s spending cuts are all weighted in the out years. For 2011 and 2012, they are nominal, if not ludicrous, with only $22 billion in cuts in 2012.

That’s pocket change. The real cuts won’t begin until 2013 or after, giving our economy time to mend, especially before the 2012 elections.

But that’s economics. The political side is much more interesting. At $2.4 trillion, the deal’s total ten-year savings is less than two-thirds of the interest on our national debt, which will be $386 billion this year alone. If all goes according to plan, the national debt will be even larger at the end of the ten years.

So did the Republicans win politically? Not a chance. They lost and don’t even know it yet. Let me count the ways.

1. After demagoguing the debt relentlessly for over a year, they had to use unprecedented political extortion to get the people, the Senate and the President to focus on it. In so doing, they distracted all from what they really care about: jobs.

2. The “deal” the GOP both forced and accepted will do almost nothing in the short term and will leave the total debt increased at the end of ten years.

3. The GOP could easily have reduced the debt substantially by raising taxes on the wealthy, or just by eliminating the most unfair and unnecessary tax loopholes and subsidies. They refused. That refusal, made at the risk of national default, showed by deeds, not words, that their overwhelming priority is preserving rich people’s privileges, not reducing debt.

4. All the effort they spent, and all the attention they got, shows that the debt is the only issue they have. They have no ideas and no plan—and they have made no effort—to give us what Americans want most: jobs. The same goes for energy independence, a rejuvenated infrastructure, better education, and scientific progress.

5. Although the GOP stood fast on their “no tax hikes” pledge, they caved on Social Security. It’s entirely off the table. That’s a good thing, because Social Security has nothing to do with the national debt. It was supposed to be self-financing. It is not so only because Congress stole from the trust-fund years ago and converted it to general revenue, breaking a solemn promise to retirees who’d already paid in for decades.

6. The GOP did get a small increase in Medicare costs, but only for higher-income beneficiaries. The deal won’t change Medicare for the people who need it most. It will only make it a bit more expensive—but still the best deal in town!—for people like me who can afford the extra expense.

7. And the best is last. If the much-vaunted bipartisan commission creates more gridlock in Congress, just as the last one did, the “automatic” cuts have to come 50% from defense.

So the GOP’s outrageous extortion got it very little. It got the debt hawks nothing, except the promise of future lackluster cuts. Anyone who can do arithmetic can tell it didn’t even begin to meet its principal ostensible objective: to make a serious dent in our national debt.

On progressives’ terms, the deal is something we can live with. On the GOP’s own terms, it’s a complete failure to anyone who can think. And it illustrates by acts, not “spin,” how little the GOP really care about the debt and deficit, and how much they care about keeping taxes on the rich low.

They care about debt now no more than they did when they massively built it up in the Reagan-Bush I era, or when Dubya annihilated Bill Clinton’s surplus and created the vast majority of today’s debt in his eight years. For them, the debt is just another point of demagoguery. Their principle objectives remain the same: (1) to support the plutocracy, lower its taxes, and increase its power and (2) toward that end, to starve and hamstring government. Watch what they do, not what they say!

To do all this nothing, the GOP was willing to risk a real economic catastrophe—national fiscal default—as well as the actual and significant loss in international prestige and confidence that their political theater caused.

The good thing is that, this time, the people were paying attention. They saw these things. They ken them dimly, but they ken.

They know there is a difference between bargaining and extortion. A bargainer may threaten to withhold a promised benefit, while an extortionist threatens extraneous and disastrous harm. When the GOP threatened to kill the hostages of America’s economy and global faith and credit, the people saw and heard. And they saw how little the extortion plot produced.

It will take time for them to put this all together. But the President, as Teacher-in-Chief, now has fourteen months to remind them.

Above all, the President has patience. He plays for the long haul. He knows that he cannot cure in a mere two years a corrupt and irrational culture that was thirty years in the making.

Lest we forget, the crazy GOP House Freshmen who nearly shot the hostages, like every member that body, have to run to keep their seats every two years. When they do, they will be up against a politician who beat the Clinton dynasty and the first serious female candidate for president despite a racial handicap whose size and power we now see. With all this ammunition at his disposal, he will likely bring us a more informed, reasonable and chastened House in January 2013, and a workable Democratic majority in the Senate.

Abused Power on Trial

While we Americans were obsessing about our debt, the GOP’s extortion, and our last-minute escape from a GOP-generated crisis, the rest of the world was moving along. Egypt, the place where western civilization began, is preparing to try former dictator Hosni Mubarak and his sons for mass-murdering Egyptian people in a futile quest to retain political power.

As I have noted before, their trial will be a seminal event in human history. It follows in a straight line from the Nuremberg Trials, which held surviving Nazi leaders responsible for the mass murder of some six million of their own people in the Holocaust.

But there are two important differences. First, the Nuremberg trials were imposed by the victors in a cataclysmic war that the Nazis started, of which the Holocaust was only part. In Egypt, the people themselves, not an outside power, are seeking justice. Second, the Nazis’ slaughter dwarfed the Mubaraks’ in scale, at least a thousand-fold.

That’s why the trials in Egypt will mark a seminal event in world history. They will hold recognized leaders responsible for murdering their own people in abuse of otherwise legitimate power, and in relatively small numbers.

The last century’s horrors, the advent of nuclear weapons, and the current age of terrorism (both murderous and political) demand individual responsibility if our species is to survive. Bin Laden has met his fate. The Mubarak family will meet justice. And next year, if all goes well, our national extortionists will get their comeuppance for their own financial crimes at the ballot box. That trifecta of individual responsibility will do much to restore balance and hope to an uneasy world, which is still smarting from letting the gamblers and swindlers that caused the 2008 Crash go free.

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