"Same Old, Same Old"

Sydney M. Williams

Thought of the Day

“Same Old, Same Old”

July 7, 2011

A few days away should provide time for reflection. The idea was to let aged-based judgment pass through pores of experience during a sun-drenched vacation; thereby permitting the proffering of a few pearls of wisdom. No such luck in my case. Time spent with six lively grandchildren on an island six thousand miles away (and across six time zones) left little time for retrospection. Besides which, I admit to too many prejudices.

The only thing that seemed to change over the past several days was the stock market’s view of the world: Greece was saved, at least temporarily; it is hard to imagine, though, that insolvency does not lie in their future. In cases suggesting prosecutorial incompetence, the French sleaze-ball, Dominique Strauss-Kahn (DSK) was freed on his own recognizance and somewhat shockingly, even for one who does not follows such trials, Casey Anthony was exonerated in the death of her child. But more importantly, the President and Congress persisted in their trip through “fiscal wonderland”, ignoring the pleas of the citizenry to resolve the deficit crisis and to put the “ship of state” on a path toward financial prudence. However, stewardship is a condition seemingly unfamiliar to those in Washington.

In the eight weeks prior to my leaving on vacation, the market fell seven percent. A relief rally was not unexpected. In the ten days I was gone, the S&P 500 rose five point five percent. But the world has not changed. Despite allegations from the IMF’s new chief, Christine Lagarde, that global economies are “accelerating”, growth remains excruciatingly slow. Slow growth has emboldened economists like Paul Krugman to suggest that more government spending is needed, despite the notable lack of success of the first stimulus plan two years ago. (The Administration, for obvious reasons, likes to compare their plight to the 1930s. However, it was only the advent of World War II that finally yanked the economy away from the grip of Depression. Hopefully, no such fate awaits us today.)

Spending beyond our means, a condition encouraged by the financial sector and facilitated by government, is what got us into the situation. Spending continues to be the problem. Steve Malanga, in an op-ed in the June 27th Wall Street Journal, wrote a dramatic exposure on the folly of government promises. Retiree costs now consume 50% of tax collections in Providence, an unfortunate but accurate preview of what is in store for us should the federal government stay the course regarding Social Security, Medicare and Medicaid. Demonstrating that excessive (and wasteful) government spending is not the exclusive purview of the Democratic Party, Republican Representative John Mica of Florida is pushing to complete a $1.2 billion rail line to serve all of 2150 commuters – a cost of approximately $500,000 per person! However, as an indicator that not all Republicans have lost their marbles (or, more likely, sold their souls for campaign contributions,) the chief critic of the plan, according to the New York Times, is Florida Republican State Senator Paula Dockery.

The problem is one of promising that which we cannot afford. At present the cost of this problem is hidden behind a curtain of low interest rates. As Lawrence Lindsey pointed out three weeks ago in the Weekly Standard, the average cost of our federal debt is 2.5 percent. Average interest costs for the U.S. Treasury over the past three decades were 5.7 percent. Interest costs today amount to about $350 billion on the $14 trillion in debt, or roughly 10% of the 2011 budget. If we were paying 5.7%, interest costs today would be closer to 22% of the budget! Our debt, given the current trajectory, is expected to grow 50% over the next ten years to $21 trillion – an annual increase of about 8 percent. It is difficult to believe that interest rates will not rise over that time. Nevertheless, as Mr. Lindsey writes: “We’re stuck in a world in which the Fed must keep rates artificially low in order to prevent a budget disaster.” But can they? For every transaction there must be a seller and a buyer. The seller is the U.S. Treasury. The buyers have increasingly come from overseas, most notably from China. With the last twelve months showing CPI rising 3.6%, how long will the Chinese be content with an annual return of 43 basis points on Two-Year paper, or 3.1% on Ten-Year Treasuries?

Anybody who argues that the problem for government is revenues, not spending, is whistling “Dixie”. We spend what we cannot afford. It is as simple as that. Government relies on an ever-expanding stream of revenues; yet they erect barriers making such economic growth more difficult.

Of course, as I have argued in the past, the tax code is a monstrosity, a labyrinth constructed to benefit the nation’s largest corporations and its wealthiest citizens – those who can afford to hire lobbyists to push laws benefitting their individual situations and to hire lawyers and accountants to navigate its treacherous waters. It also benefits the 50% of Americans who pay no federal income taxes. It is the broad middle class and smaller and mid-size companies that have suffered. Myriad deductions and credits should be removed. A simplified and flatter code, with lower nominal rates for both individuals and corporations, would generate more revenues, more fairly.

But one should not confuse the issue of tax reform with the need to curtail entitlement spending. Both are necessary, but they are not related. Simply giving more money to government without restraints is like providing an alcoholic another drink.

The last two or three decades have witnessed remarkable and positive changes in much of the world, from Eastern Europe to Latin America to Asia – the rise of liberal capitalist democracies. The rate of change has been uneven and some have suffered. For others the pace has been too slow. The spark that created this change emanated from the success of the United States over its 222 year history – a history that itself has not always been even or fair; but in balance it is one that has worked remarkably well for millions of people. As Walter Russell Mead wrote last weekend in the Wall Street Journal, “The tsunami of change affects every society.” However, the spreading of capitalism around the globe makes uncomfortable those wedded to the past and unable to adjust. Mr. Russell went on, “Industry migrates around the world at a breathtaking – and accelerating – rate.” And so does money, chasing the best returns given the degree of risk one is willing to accept – a factor that the Fed and the Treasury must keep in mind.

In terms of global competition, Washington has become a drag, restraining development, discouraging foreign investment, clinging to ways and means that were critical one or two generations ago, but today hinder not aid progress. A focus on equality of outcomes – a manifestation of social democracies – is no substitute for equality of opportunity, which should be our goal. We do have problems, and if we admit to them honestly they can be addressed. When it comes to change, we should have the home court advantage. America is an immigrant nation whose society and wealth is fluid. Perhaps some good will come from the President’s meetings today. I certainly hope so, as do millions of others, but thus far politics have trumped common sense.

An old but true saying suggests that coming home is the best part of any trip. It was nice to be away. It was great to spend time with some of my grandchildren, but it is good to be back in New York.