Taming the Borrowing Beast

The last time the United States operated on balanced budgets, that is, spending no more money than collectable in taxes, was during the Democratic Administration of President Clinton. In its final annual quarters, that administration’s budgets yielded a surplus; that is, the federal government collected more in taxes than it spent.

According to the still dominant business cycle theory of British economist Lord John Maynard Keynes (1883-1946), governments should take in more money than they spend during good times so that in hard times they may ease the pain by spending more than they take in.

The Biblical Joseph was a kind pre-Keynesian, interpreting Pharaoh’s dream as forecasting seven “good years” in which to “pile up grain” in “reserve for the seven years of famine” to follow (Genesis 41:35-36). I corresponded with Lord Keynes’ brother, Sir Geoffrey, a distinguished Blake scholar about my edition of William Blake’s Four Zoas. I think Sir Geoffrey might recognize his brother Maynard’s prototype in the patriarch Joseph.)

In the 1970s, President Nixon corrupted Keynes’ theory for taming the business cycle by using it to tame the electorate. Risky inflationary spending made people foolishly happy enough to re-elect him.

Continuing in the Nixon tradition, President George W. Bush, at the first sign of declining economic prospects in 2001, applied a big dose of Nixon voter happiness balm with risky inflationary tax cuts to the wealthy, and, as if that was not enough, began a war in Afghanistan. In 2003, came more tax cuts to the wealthy and the Iraq war.

Tax cuts plus war spending are wildly inflationary. They induce voter euphoria for a while—the seemly endless feast of dollars garnished with patriotic fervor are delicious—but eventually the happiness bubble breaks, and we are at the mercy of a grouchy Borrowing Beast.

That beast leaves us, in the words of Alan Greenspan, with choices that are no longer between “the good and the better,” but between “the bad and worse.”

How do we, an electorate addicted to an illusory prosperity from a political financing fix, tame our Borrowing Beast?

First, as in the ‘twelve steps’ method, we have to face the fact of our addiction.

Next week: Cold turkey, more junk or slow but sure?

Hatching a Brand New Beast

Nine years of tax breaks authorized by President Bush and a Republican Congress in 2001 and 2003, expressed in terms of the cost of proposals to extend them beyond their present December 31, 2010 expiration date, total $3.7 trillion (Washington Post).

These were the first wartime tax cuts the United States has ever enacted.

Borrowing money to cover both war expenditures and tax breaks is the kind of reckless financing that leaves us “nothing with which to make no down payment.” See my earlier blog.

Alan Greenspan, Chairman of the Federal Reserve Board on whose watch this dangerous borrowing occurred has since acknowledged his mistake and its terrible consequences. Another earlier blog.

Greenspan now calls for a complete repeal of the 2001 and 2003 tax cuts. But beneficiaries of these tax cuts and the politicians that speak for them continue to insist on extending $3.7 trillion in risky tax breaks at a time when the nation is up to its ears in debt, in a deep recession and still at war. They spend tons of money and spread truckloads of lies to buy a Congress in this fall’s mid term elections that will extend $3.7 trillion risky tax breaks that expire December 31, 2010.

Legions of very expensive professional lobbyists orchestrate grass roots agitation, support Congressional obstructionism (approaching 200 filibusters since 2008) and reinforce it all with big business money hoarding. Cash reserves of Georgia’s largest Fortune 500 firms have roughly doubled since 2007 (Atlanta Journal-Constitution).

These tactics paralyze efforts to tame the marauding monster that has devastated our country since 2007. Long term unemployment. Reduced public services in education, road and bridge maintenance, libraries, street lighting, etc. pave “a long unlit road to nowhere” (Paul Krugman) “toward third world status” (Arianna Huffington).

President Obama, like President Roosevelt 87 years ago, is far more forgiving of Republicans than they are of him. Obama currently proposes to leave in place $3 trillion of Bush era tax cuts, canceling only $700 billion of the $3.7 trillion total.

$3 trillion paid for with borrowed money duplicates almost exactly the risky financing that unleashed the present monster, hatching a brand new beast only slightly smaller (81%) than the original.

The Justification is “stimulus,” but that’s a heap of stimulus! $3 trillion to people, who, unlike the poor, have no incentive to spend it. But neither “stimulus” nor “lower taxes” address “where the money is.”

According to James Surowieki writing in the New Yorker, “People who earn a few hundred thousand a year have done much worse than people at the top of the ladder.

“Between 2002 and 2007, for instance, the bottom 99% of incomes grew 1.3% a year in real terms—while the incomes in the top one percent grew ten per cent a year. That one percent accounted for all income growth in those years.”

Instead of tax brackets that obscure the difference between someone earning two hundred thousand a year and someone earning two hundred million, we should refine tax brackets into smaller, fairer and less controversial subclasses. Such revisions could turn the ugliness of the present effort to extend risky 2001-2003 tax breaks into a healing, useful reform.

photo credit, flickr, Limbic, Jonathon Davis

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rtwork: CBS, The Family of Music

Paper Money Makes Voters Happy

“We will soon run out of that nothing with which to make no down payment.”

That’s the way, some forty or fifty years ago, Canby Balderston, former dean of the Wharton School of Finance and later one of the governors of the Federal Reserve Board, concluded a carefully documented talk on the reckless financial practices then beginning that have since left most of us with plenty of nothing.

Despite the warnings of true conservatives like Canby Balderson and Paul Volker, former Chairman of the Federal Reserve Board, Republican politicians, beginning with President Nixon could not resist the temptation to buy elections with ever-expanding extensions of credit.

The paper money in your wallet is labeled, “Federal Reserve Note.” Everytime the U. S. borrows money, it issues promissory notes of the Federal Reserve or some other federal agency; the more it borrows, the more money in circulation, and the more happy voters. President Bush was a master practitioner of this art, engineering tremendous tax breaks for his wealthy supporters while dishing out giant wartime spending contracts to please their profiteering hearts.

But then there comes a time of trying to live on nothing—like Ron Bouchard reports in the Atlanta Journal-Constitution of August 9, 2010:

“I’ve worked my entire life. I’m a decorated Vietnam War veteran who served my country in three combat tours. I have been nationally recognized with outstanding achievement awards throughout my employment history, and I worked for decades without a single sick day. . . .

“My wife and I took our four sons to church every Sunday. I paid my taxes, voted in elections and got involved in community service. I always felt there would ultimately be a reward in life for working hard, . . .and doing all the right things. . . .

“I lost my job in January, due to the recession. Since then I have applied for more than 1,200 jobs. I’ve sent out countless resumes and cover letters. I’ve scanned the job ads, I’ve gone to job fairs, I’ve networked, and I’ve done all those things that the “experts” advise. . . . It’s all been just a big waste of time.

“It’s hard to believe the reality of just how bad the unemployment picture these days is unless you’ve actually experienced the frustrations of it all on a daily basis. Almost half of the Georgia workforce has been unemployed for six months or more. . .

“One potential employer boldly posted a notice saying, “Those who have been unemployed for over six months need not apply.” It’s hard to believe that this is happening in our country. . . .”

Do you remember the last time the United States ran a budget surplus — in the Democratic Clinton Administration?

Did you notice the cost cutting and debt reduction provisions — in the recent Democratic Health Care legislation?

photo credit: flickr, SqueakyMarmot

Gambling With Your Money

“I am shocked, shocked, to find that gambling is going on in here!”

— Claude Rains as Captain Renault in Casablanca

Voter discontent, including that of the “Tea Party,” has to cut itself loose from the reckless Republican politics of the last forty years if the nation is to survive the economic catastrophe its gambling has led us into.

The recently elected poster boy beneficiary of protest voting, Republican Senator Scott Brown of Massachusetts, is still marching to the tune of the Republican politics that fathered our currently marauding economic monster.

According to John Cassidy’s article, “The Volker Rule” in the July 26, 2010 issue of The New Yorker, Scott Brown, as the price of his critical sixtieth vote to prevent a filibuster of Financial Reform legislation, demanded and obtained changes that plowed a gaping hole in that legislation’s prohibition of banks entrusted with our federally insured checking and savings account deposits investing their capital in risky hedge funds and private equity funds.

These restrictions on “commercial” banks (checking and savings account deposits) distinguish them from riskier, private “investment” banks like Goldman Sachs (trading in stocks and bonds) was a cornerstone of the Glass-Steagall Act passed by Congress in 1933 without a single dissenting vote. It responded to Congressional hearings disclosing outrageous financial abuses that led to the Great Depression of the 1930s. In 1999, the Glass-Steagall Act was described as “archaic” by Alan Greenspan, then chairman of the Federal Reserve Board, and was repealed by a Republican Congress.

October 23, 2008, the chairman of the House Committee on Oversight and Government Reform, Democrat Henry Waxman, after quoting a lot of Greenspan’s former statements urging deregulation of our financial institutions, asked Greenspan, “Were you wrong?” To that question, Dr. Greenspan replied:

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting . . .their equity in the firms. . . . The problem [is that] something that looked to be a very solid edifice, and, indeed, a critical pillar to market competition and free markets, did break down. And I think that . . . shocked me. . . .” (As reported in John Cassidy’s book, How Markets Fail, Farrar, Straus and Giroux, 2009)

Shocked or not, Dr. Greenspan and most professional economists involved repented their mistakes.

Disenchanted voters, however, including Tea Party supporters, may be excused for being unaware of the foregoing history, but not unrepentant Republican congressmen and senators, including Senator Scott Brown.

photo credit: flickr, Jerry Paffendorf