Tuesday, July 26, 2011

What Tuesday's Impending Debt Debacle is All About

By Son of Bastiat

“Law One of Life: what goes around, comes around”

This essay, a follow up on the subject of raising America’s public debt ceiling, elaborates on some issues often ignored in the current debates. They deserve a second look because how this debate is resolved will matter to the world like no other event has in the past 75 years. Whether it will be a one-off rise or a series of increases in the ceiling, what combinations of tax increases or spending cuts will be involved, or whatever mix of discretionary and mandatory items will be traded off to satisfy the fiscal constraints, those are mere details in a complicated drama whose lessons apply with equal force to America and to every country that has funded development plans and social commitments with debt (or more precisely, by running budget deficits that are covered by borrowing in the open markets or monetizing obligations.

What we cut out are the maneuvering, the posturing, and the brinkmanship that happened en route to the political resolution. Those theatrics and situational decisions reflect more on the personality quirks and political talents of the contending players, many of whom, if it means anything, have been educated in the law. More revealing are the breathtaking demagoguery and schadenfreude that were used to set the public up, which indicates that DC thinks this impasse is just another routine item in their to do lists. The real disappointment however is in the way the significance of the issues have been swept under the carpet, which is why whatever comes out of DC on Tuesday will probably not amount to much. As such it would be more instructive to refer to the sociology and economic history books for insights on how to view this debate, of which it can be said, with just an iota of exaggeration, the economic world’s fate now depends. In short, nothing but the low down, although it will take a detour before it arrives there. 

How Moral Precepts Shape Economic Debates

What is amazing about the debt ceiling debate is how much of it is the offshoot of two innocent errors (OK, one was a tragic omission) that happened during the founding of economics. The first error was a faulty interpretation of a phrase in the writings of economics’ founder Adam Smith. That phrase, which because of its importance deserves a future essay of its own, had the unfortunate effect of taking “morality” from out of economics, an ironic and surely unintended outcome from a man who was a moral philosopher first before he was an economist (in his later works Smith himself sought to clarify it, to no avail). At any rate the mistake led economics down a path that in the course of centuries would forever stamp it with the idea of being mostly concerned with material things such as the efficiency of producers than the welfare of its beneficiaries (ie, consumers). But as if all this was not bad enough, the young discipline committed a serious omission – it ignored the crucial issue of distribution in its laws altogether. It contended that the sharing of the fruits of production was to be left to local customs and practices, an after-thought almost. Workers are paid such amounts as they needed to survive, at wages and working conditions that reflected their scarcity value as developed in the dismal theories of Ricardo and Malthus. This neglect was bad enough to cause the philosopher John Stuart Mill to propose that a proper distribution theory be included, but his views did not gain as much currency as those of Smith’s (and founders); that is simply how this fatal omission got embedded in classical economics orthodoxy.

The rest, as they say, is history: the appalling working and living conditions of workers were picked up social reformers whose capacity for outrage were matched only by their naivety about business realities. Soon the demands for more equitable distribution of the gains of production rose in tandem with advances in social thinking and the growth in mass movements such as labor unions and workers’ rights; these passions generated the ideas that now animate the liberal and progressive philosophies that underpin the pro-entitlement and pro-big government side of the debt ceiling debate. From this viewpoint, the conservatives’ unmitigated greed and insufficient compassion for the welfare of their partners in enterprise had now met comeuppance in the strident liberal opposition to their cause. As Newtonian Mechanics put it, for every action there is an equal opposite reaction.

For the sake of balance it must be pointed out that conservatives’ resistance to progressive reforms have, by no means, left workers as gravely exploited as Marx and socialists had predicted. More workers have been lifted out of poverty and their conditions ameliorated by capitalism than under any other economic system, while ensuring that society built up its capacity to produce and distribute the gains, as unsatisfactory as those may have seemed to others. Today, almost 300 years after its founding principles were laid, the market economy remains the primary generator of society’s largesse. Even if it remains true that some capitalists, if given the chance will exploit and cheat workers of their dues, that once ugly feature of the workplace has been corrected in many countries by progressive legislation and enlightened regulation, their effectiveness subject only to lawmakers’ or enforcers’ own limitations. Clearly what was going on was no longer the Dickensian exploitation (that inexorably condemns workers to poverty) that is the core of the liberal belief, as much as subjective perceptions of deprivation relative to some notion of a “fair” reward for participating in enterprise. Sometimes these are merely expectations that reality can never meet; once given, they take on the nature of “rights” that cannot be easily withdrawn. The stickiness of entitlements is one reason why debt ceilings are biased against taxes. 

The Institutional Roots of the Economic Problem

This is why liberals and conservatives part company. Conservatives are too quick to resist workers’ demands due to the incompleteness and slippery nature of moral arguments, being more astute observers of human nature and aware of other factors (eg, the complexities of motivation and low wage offshore competition) that affect this issue, whereas liberals are too quick to rely on raw emotions and are generally less caring about the other factors that affect enterprise (eg, the need to incentivize risk capital) other than economic justice. In fact, dispassionate analyses using ideas from game theory (eg., co-opetition instead of competition)  have shown, time and time again, the wide room for compromise and settlement of these competing claims, benefiting not only both sides but society overall. The failure to join this issue lies at the heart of the unfortunate and wasteful conflict that has bedeviled modern society. It is the root cause of the economic instability that now threatens, in the form of a debt bomb and not terrorists’ IEDs, to blow up not only America but society as well. Debating how to raise debt ceilings do not come close to touching it; it only shows how the craft of politics has fallen behind reality.  

Here astute readers would have noticed that the substantive issues underlying the distribution debate have moved away from the purely economic or even business concerns towards the dynamics of social psychology and institutional behavior. Realizing how “non-economic” these ideas are, and completely forgetting how their omission and misinterpretation have led economics down to the thorn laden paths it is treading on now, some economists tried to side-step the issues and came up with one more avenue of exploration – what today is known as institutional economics, but which in reality is nothing else but the study of economics as if people and institutions mattered. Nowadays the names frequently associated with this inquiry are Douglass North and Oliver Williamson, but in fact their ideas draw from deeper and older roots, specifically those of political economist Joseph Schumpeter and the social critic Thorstein Veblen. Already dead long ago, what dismays people is that their ideas are still ignored. 

Space does not permit a fuller exposition of their ideas so suffice it to say that these men, seeing how hopeless capitalism’s prospects then and yet never confident of any alternative to it, offered a peculiar critique of it that sought to “criticize capitalism in order to save it”. (Schumpeter once described capitalism as being a spectacular economic success but a staggering sociological failure, even if he also taught that capitalism’s end game was socialism, albeit in its “democratic” variety). There is only one problem with their analyses of capitalism – what appeared to be prescient when compared to Marx’s crude analysis - were in hindsight gross exaggerations of its demise because they were based on the social realities that prevailed then. So, both for lack of any better alternative as well as the fact that capitalism continues to improve on its failings, institutional economics as a way to revise it again proved to be a failure. The score was zero for socialism and floating for capitalism because it kept evolving.  

In case the reader has missed it, the reason Schumpeter’s visions (and that of newfangled institutional economic theories (NIE) have failed, despite throwing in human and organizational factors into the pot, it is because there is still something missing in their recipes. What could this mysterious ingredient be? Could a radically revised economics, along the lines suggested variously by Fr. Lonergan, B. Hogdkinson and complexity/evolutionary economists such as R. Nelson perhaps save the world in ways that today’s grandstanding and demagogue-spewing DC politicians can’t?   

Back to Square One – the Mind   

All of these new ideas no doubt can supply much needed improvisations over the basic economic framework that after 230 years is now falling into irrelevance on account of unforeseen events. Some like the radical revisions proposed by Hodgkinson could help immensely in rationalizing the creaky technical apparatus and policy mechanisms that John S. Mill never got around to incorporating in the Classical Economic system. Some like the evolutionary economic ideas of S. Winter would help dispose of the nonsensical ideas of value theory (like the Labor Surplus Theory of Value) that have supplied so much defective ammunition to the Socialist arsenal, that has not only wasted the lives of millions who perished in utopian communist experiments, but serves to distract even their latter day fellow travelers. These are all fine, except that they are only simple technocratic refinements to a vastly more complicated and inscrutable phenomenon called man. Unless this latter entity is truly understood, many of those gains would be temporary as well. For sure they will buy society some more time than is now allowed by the public debt ticking time bomb that somehow ought to be reset before midnight of August 1st. How much time it buys though, is anyone’s guess. But it is definitely worth a guess, though.

This writer is convinced that the one, true and permanent solution consists in a behavior modification effort whose purpose is to overcome a fatal defect that even the Classical Economists and all other economists from John S. Mill all the way down to Schumpeter and Veblen have tried hard but failed to incorporate in their own modifications to the basic capitalist economic framework (despite the former’s morbid wit). But this is because the culprit is also part of the very same essence that animates capitalism itself and is responsible for its unusual success. This cancer (for it is what it is) is called materialism, one manifestation of which is the grasping for achievement and monetary rewards, without which much of the mainsprings of economic success would ground to a halt. In this sense materialism’s grip is not only universal but intimately bound with the capitalistic system itself so that any attempt at reforming its claddings and superstructure would not be fundamental enough to make a real difference. In this case what needs changing is nothing less than man’s inner nature itself, an idea that economists would consider weird, to say the least. But weird or not, it looks like the only arrow remaining in man’s quiver.

Yet, exactly what does “fundamental behavioral modification” mean? Years ago, in a small bookshop in Zurich the writer found the answer in the pages of a book written (in 1957 when this writer was barely 3rd grade) by the Swiss Carl Jung, one of the world’s greatest psychiatrists. This slim, brittle and now frayed book was among the first attempts to answer the riddle of the Undiscovered Self which is also its title. What is remarkable about this book is how it explains religion’s crucial role in helping man to attain the critical balance that individuals need as they navigate the treacherous shoals of modern life. But what is tragic is how this vital function has been thwarted by institutional religion’s excessive emphasis on rituals, ceremonies and hierarchies that have distracted it from providing man with the assistance he needs. Bereft of it, man has morphed into an automaton that was easily manipulated by big, powerful institutions whose policies now threaten to enslave and reduce him to an imperfect caricature of the Creator in whose image he was made. Today tens of thousands of books have been written on this subject but the ideas first propounded in this slim book hold the key to the dilemma confronting society.

Conclusion: The Painful Realities of Just Deserts

What an irony then, that man who was created to harness and master the whole of creation ends up being dominated, not by the lower hierarchies of that same creation but by material and tangible products made by them. Instead of using his mind to edify society and His works, he ends up trapped in the mindless pursuit of faux trinkets, including the meaningless adulation of peers whose judgments are as flawed as his. The ongoing impasse on the debt ceiling is a perfect example of the meaningless pursuits engaged in by the members of the elite classes. In these debates the economists, who supposedly are trained to render judgments that transcend the narrow criterion of efficiency, either end up completely silenced like the economists at the CBO, or like Krugman co-opted in their views by their professional affiliations or ideological cohorts. On the other hand the masses are, like lemmings, led by leaders who know nothing better than use the tools of technology to divert them from the real issues.

For the implications are ugly, to say the least; there is no conceivable plan or policy that can bring that monstrous $ 14 T PUBLIC debt down to manageable levels given the spending cuts, tax increases and growth scenarios that are assumed in DC. Adding up to public debt all of the government’s unfunded liabilities for Medicare, Medicaid and Social Security, along with US guarantees on failing pensions and the actual liabilities of state and municipal governments, the total exceeds $ 100 T!. Even a moron would have long ago concluded – when viewed in the context of the 75 years when the Federal government started to intrude over the economy (IN PURSUIT OF NOBLE AIMS THAT PRIVATE SECTOR, IF ONLY IT WAS MORE RESPONSIBLE AND COMPASSIONATE, COULD HAVE HELPED MITIGATE), that this is not a revenue (or tax problem) but a proclivity to spend on social programs using debt, PERIOD!

One wouldn’t hear that from this country’s leaders, especially this sitting President who instead of providing much needed leadership, has actually turned this into an opportunity to enhance his 2012 chances by hosting five press conferences in a month to talk about how others’ fiscal plans (he didn’t put up one) are not meeting expectations set down by him. In other words, all by his lonesome self. Me, myself and I, in the capacity of the strict parent lining up the kids for a much needed whipping until they are all behaved, ready to eat their cereals and carrots before jumping to their beds. But wait, that is not yet the icing on this cake! The ultimate tragedy is that Americans are already getting close to the point of seeing all of this as a mere drama, a charade and a very boring one too. Holy Smokes, $ 100 + trillion that the next ten generations would be saddled to death servicing, yet still looked at as mere par for the course! Making things worse, there are actually many Americans who think that all of this stuff is just for economists, or worse, for philosophers who have nothing else better to do than read and think. Well, if they are stupid enough to think that philosophy is useless stuff, they had unwittingly just condemned a philosophy which they themselves had formulated (shades of Anselm’s Proof of the Existence of God).

How did things get to this? How did politicians this self-absorbed get elected to these lofty positions of power? Again, Jung had the answers down pat: the undiscovered realms of the self. Having been condemned to a non-life of perpetual labor because of poor redistribution policies, and getting no relief from institutional religion that is also too absorbed in its own rituals, they are now falling back on their innate resources (the ego) to get back at the society that makes it so hard for them to live normal lives. It is in a way a corrective mechanism that lets those who don’t get what is due to them, to get back just the same at all those who failed to give it to them.

Today it comes in the form of a debt bomb; tomorrow a real WMD? Truly, what goes around, comes around. VRR@NYC2011

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