By Vincent Ricasio
Yesterday’s devastating 260 points decline in the Dow, the 7th or 8th consecutive drop in as many days, an event which has had no precedent since 1987, despite (or perhaps because of) the president’s signing into law of the debt ceiling increase negotiated last weekend by both houses of Congress, is a portent that things are not going well on the economic front. Many pundits have, of course, have said as much right after the Senate voted on the amended version of the House Bill, but their arguments were more focused on the impacts of the new law on the deficit, and, through that, on job creation, wedded as most of them are to the discredited Keynesian prescription of using government spending to stimulate economic growth, in contrast to the less known but more insightful debt-deflation theories proposed by the Yale economist I. Fisher and F. Machlup, which requires “real” economics to bow down to the “veil”, a not very pleasant prospect for many economists who to this day still dismiss finance as economics "on stilts"
Well, not only has the evidence shattering that myth come again 70 years after the New Deal (the sorry job creation record post TARP II, the $ 787 B stimulus blowout, the mortgage write downs, the cash-for-clunkers and the extension of unemployment insurance, etc.) but there are again rumblings of a second contraction, a reprise of the earlier massive 3.3 million job elimination that more careful studies of the past century’s FINANCIALLY triggered recessions always seem to bring about once the stimulus is stopped, somewhat akin to the catharsis that drug withdrawal brings about. This coming recession is evidence that the markets are discounting the impact of the debt ceiling agreement, seeing ahead of the curve, the dysfunction that interventionist fiscal policies have never overcome, in the form of timing errors that always bedevil all attempts to “beat the cycle”. Unfortunately the lessons are always painful, borne not by the economists who deftly bailed out of this administration as soon as they saw the writing on the wall, but by the millions of workers who will lose jobs, again, not only in the US but abroad. As if it was not enough devastation.
Which brings me to the real purpose of this brief memo: If based on the recent debt ceiling debates, it doesn’t seem any more possible that political consensus can pacify people’s (which is what markets are made up of) unease about settling the great debate between liberals and conservatives on what to do with social spending, then why not do the second best – fully disclosed policies and rules, agreed to beforehand by both sides, as to the amount and composition of government spending on such things as welfare and entitlement? This way the room for maneuver is known if not with full certainty then at least with some allowance as to timing, the uncertainty which spooks markets the most. Compare this to the current practice wherein politicians, always with an eye to their future electoral prospects, posture and preen before their respective bases, which in turn excite the extremists on both sides, making real consensus all but impossible. The only reason the debt ceiling debate turned out the way it did, despite the fact that conservatives were the minority in this tri-partite government, is because the negotiators were aware that slowing down government spending was what the Nov. 2010 elections was all about. You wouldn't hear that from the commentariat/blogsphere.
But look at what the “agreement” cost America: other than a no-tax increase provision, all that the law accomplished was a one time spending cut that stretches over ten years, to be matched by pledges to cut some more based on the recommendations of a bipartisan commission. Anyone who understands how DC defines budget “cuts” and has a modicum of knowledge of their unique syntax knows that commissions are mere ploys to defer hard decisions past elections. The $ 2.3 T increase in the debt ceiling was meaningless, both because it is just an imaginary line-in-the-sand that will be increased, again and again once the deficits roll in as they will. And besides the credit raters won’t base their downgrades on such an inchoate variable, knowing full well that nothing real was done on the cause of the deficits and aware that the US has long breached its “mental” debt ceiling. So what was the point about the law? Exactly this: to keep this radioactive (but symbolic) topic away from public consciousness until at least 2013, a year after the elections. So, in that sense, President Obama the ineffective leader that he was shown to be, still managed to win. If you think the conservatives will abide by that, there is a bridge for sale on the East River. It will be business as usual in a while.
So what will a welfare policy “on autopilot” do? Answer: it will take away (or at least reduce) from politicians their power to tinker around with social policies as a vehicle to enhance electoral chances by manipulating the poor and even the not-so-poor (who thrive on the social largesse). A policy that, say, sets down public spending on social programs at a preset level (absolute + some amount that varies based on a GDP above a certain level, etc) will take a lot of the ideological hot air, acrimony and moral posturing that keep radicals on both sides agitated for nothing. One need not revisit that largely, ugly, unresolvable debate: the liberals, on the one side, accusing the right of callousness and lack of concern for the poor; and conservatives charging liberals of being patsies for the institutions and vested interests that thrive on the poverty cottage industry. The fact is that they both deserve each other as excuses for their not acting more responsibly: the conservatives for lacking in moral conscience, and liberals for advocating woozy policies that respect no limits and suffer from slippery slope inadequacies.
For economists, the details are mind boggling (what social policy isn’t) but instead of wasting their time debating whether Keynesian multipliers are 2 or 0 (or even -1), they could be more socially useful in helping design these practical rules. One particular issue they will have to address is whether “rules” could exacerbate cyclical imbalances, although automatic stabilizers do work to correct it without the discretion that bedevils human interferences in the economy. Over the longer run, nothing short of a truly radical restructuring of the economy would be needed, along the lines propounded by economists like B. Hodgkinson and others, where the “rich landowners” (proxy for unearned income and other privileges accrued merely for being present when the goodies were distributed), would be assessed for their social tuitions to fund welfare, which also reduces policy discretion and leeway for agitation. Here is where liberals are correct in essence, but wrong in tactics (if only because they still lost the debate).
Such questions are a worthy of the best minds to address, for the status quo is simply too terrifying to contemplate: the three top items in US social spending (Medicare and Medicaid and repaying Social Security) would, unless something truly radical was done, eat up as much as 70 % of the US government budget in about two decades. That guarantees that every time America enters through another serious fiscal dysfunction, the economic health of the world would be in grave peril. And all due to unresolved inner conflicts that show up as political hostilities? Why punish the rest of the world for US government dysfunction? People who still think that that debate in DC was about politics do not understand the real causes here: Read my lips, cut government down!
In a way this is really sad, to have to use “formulas” and “rules” to handle what ideally should be dealt with using natural human empathy for others and restraints on uncontrolled passions. But this is man as he has become now, and until religion has returned to its true function in society as Jung once pointed out, these solutions will be mere stop gaps that will blow up again and again. Or maybe that’s part of the Plan.
[V. Ricasio, copyrights NYC2011]
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