Wreckonomics: America’s Fiscal Policy in Action

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“The Moment of Truth” is upon us or so proclaims the title of the report issued by the bi-partisan National Commission on Fiscal Responsibility and Reform. The report correctly identifies the fiscal mess we now find ourselves: deficit spending that is unsustainable and entitlement programs that can’t possibly keep their promises without massive tax increases. To the Commission’s credit, its proposals likely would find broad support from economists. But for political reasons, little or nothing is likely to be done, at least until a crisis develops. The same factors that put us into this mess are the ones blocking reform: politicians prefer policies that provide benefits now and costs later. The Commission’s proposals would do just the reverse.

The behavior of politicians reminds me of a personal experience with a troublesome bear in Minnesota. The big bear appeared at my cabin porch one day drawn by aromas of some steaks cooked the night before. The bear tried to enter the cabin by rearing on its hind legs and trying to push in windows and doors. Finally I resorted to banging pots and pans to drive the beast off, but not before he knocked over a few things in the yard. I called the Department of Natural Resources to report the bear. I had hope of getting someone to come out to move the bear further into the wilderness. The DNR officer asked me to explain what had happened. After doing so, the officer said: “So he was just doing bear things?” It was obvious the DNR was not riding to the rescue.

Politicians are a lot like bears in that they just do “politician things.” It is just the nature of the beast. To get elected, successful politicians know that they must provide benefits to constituents who can provide votes and/or money. These constituents are usually members of special-interest groups who receive substantial individual benefits while costs get dispersed over a large numbers of taxpayers. Some years back, a study on the milk-price support program showed the program raised milk prices about a penny per quart. Benefits to the milk producers were in the hundreds of millions of dollars. Few government programs can stand up to a rigorous benefit-cost study. Far too frequently, the benefits of the programs are less than the costs to taxpayers.

The “cash for clunkers” program in 2009 provides a nice illustration. Billed as a program to help save the environment and put autoworkers back to work, the government gave people with “clunkers” up to $4500 to trade in their old vehicles for new more fuel efficient vehicles. The “clunkers” that were traded in had to have their engines and transmissions destroyed. I and a fellow economist, George Parsons, put the clunker program under a cost-benefit analysis and concluded that for every $4000 spent by taxpayers there was a $1,000 net loss in value, even after including environmental benefits. Imagine a private business that took $4000 worth of inputs to produce a product worth $3,000. How long would this business survive? But politicians seem to flourish.

On a much larger scale, the Medicare, Medicaid and Social Security systems already have provided or promised benefits far in excess of any reasonable ability for us to pay for them. Economists have estimated that, if these programs were actuarially sound, they would have amassed an additional $60 trillion or so in financial assets. One prominent economist and past President of the St. Louis Fed has said that the future tax rates needed to finance these programs with their current promises would “produce tax rates inconsistent with a market economy.” Obviously promised benefits are going to be cut, but which politician is going to step up to the plate? It likely will require a monumental crisis before a solution is seriously sought.

Is there any way to improve government governance? This is a key question, but one with no easy or obvious answers. Improving government governance is arguably even more difficult than improving corporate governance. I’m working with a colleague on a book and we plan to explore some possibilities. But don’t expect any magic solutions.

Transcript of Research Presentation given on February 24, 2011 at the New York Historical Society

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The greatest threat facing the US today is….

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The handwriting is on the wall and the ruling class is beginning to realize as the 2012 elections approach, there are going to be wholesale changes in Congress and their corrupt puppet politicians are going to be voted out of office. There may be efforts at rigging the election or voter intimidation by unions and special interest groups, but this will only guarantee a violent backlash. The general population has become better informed thanks to the internet and the New Media. They are not happy.

Looking at this from a purely technocratic sociological viewpoint, avoiding mass riots and violence while this many desperate people lose life-sustaining programs appears to be an impossible task, and given our current economic and political environment this seems inevitable. What’s going to happen in this society when these people are without jobs, when their families hurt, when they lose their homes in massive numbers a neighborhood at a time? The scenarios are grim. Former US Director of National Intelligence Dennis Blair recently testified before the Senate Intelligence Committee stating that the greatest threat facing the US is not terrorism, it’s the current economic crisis.

“The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications. The crisis has been ongoing for over a year, and economists are divided over whether and when we could hit bottom. Some even fear that the recession could further deepen and reach the level of the Great Depression. Of course, all of us recall the dramatic political consequences wrought by the economic turmoil of the 1920s and 1930s in Europe, the instability, and high levels of violent extremism.”

This propaganda effort is only a temporary measure and will not suffice over the long-term. As the economy continues to collapse, the banking elite risk being overthrown as a result of their own greed. So they will then turn to physical violence to suppress populations that can no longer be controlled through propaganda and economic coercion. The classic strategy of an endangered oligarchy is to divert discontent among the population into nationalistic militarism. It is time, once again, to bang the drums of war and whip the citizenry into a patriotic fervor. An increased external threat will lead to an increased internal crackdown, which creates the pretext and conditions for a police state. As we have already seen in the first phase of the crackdown on civil liberties since the “War on Terror” began, when rioting and outbursts of armed insurrection begin within the US, external threats, real or imagined, will again be presented to justify extreme measures to suppress American citizens, and to further repress internal dissent. Without an external enemy to rally the population against, the population will rally against the pre-existing internal powers.

To put a slight twist on what my father once told me back in 1988: The banking cartel “constructs its own inconceivable foe, terrorism. Its wish is to be judged by its enemies rather than by its results. The story of terrorism is written by the state and it is therefore highly instructive. But they must always know enough to convince the people that compared with terrorism; everything else must be acceptable, or in any case, more rational and democratic.”

It would not surprise me in the least if some enterprising guerilla journalist were to uncover the fact that people like Stephen Lerner were actually on the JPMorgan payroll. The art of misdirection is not just confined to the worlds of magic and politics. The average American is dreadfully unaware of just how depraved these people are. The little regard they have for human life is beyond common comprehension.

Is history repeating itself? Not to oversimplify an extremely complex situation, but this is all too similar to the origins of World War II. The looting of the masses by unaccountable Wall Street elites led to the Great Depression and set the conditions for WWII. Desperate and impoverished populations increasingly supported more and more extreme leaders. The conditions are now so ripe for world war that even the leading leftist intellectual Noam Chomsky was quoted in the April 2010 edition of The Progressive comparing modern-day America to Weimar Germany prior to the outbreak of WWII. Research the history of pre-war societies and you will see how our current political environment fits historical precedent like a glove.

After analyzing our current crisis and studying well-established historical precedents, one must conclude that the global bankers have only three possible cards left to play. The first is admitting culpability and working to restore the American economic engine to its free market potential. History has taught us that the ruling class rarely admits error and never concedes power. The second is to foment so much civil unrest and fear that the general population will be clamoring for a global dictator who will provide them food, shelter and security in exchange for their individual freedom and sovereignty. The final play is global conflict where they can try and control the outcome by means of funding both sides.

Of course, the one-tenth of one percent of the global population hoarding our wealth could give back a significant amount of the $39 trillion they looted from us (not counting what they have hidden in offshore accounts). That would certainly go a long way to fixing the crisis they have caused; but that’s another thing the ruling class never does. They never give any money back, no matter how excessive and ill-gotten their gains.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

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