Why is European Civilization Collapsing?

By Son of Bastiat
  
“A culture of defeat and pessimism, abetted by faux compassion, brings the world down on its knees”

Scanning last week’s Time Magazine after this essay had been substantially written, after the Dow Jones Industrial average had again plunged down (at one point by as much as 528 points), and after parts of the smoldering city of London had quieted down into ashes and cinder, the author tried hard to discern what it will take for pundits to understand the reasons why civilizations explode violently with such suddenness.

Once again the economists blamed it on the effects of runaway sovereign debt and fiscal spending. The sociologists were blaming the withering effects of these cutbacks on the welfare state. There was recognition that something else more fundamental was at work, but few speculated on what it was. Slowing down economies and failing welfare programs are decades long phenomena no longer fit to report unless there is something new. . . like China’s impending societal collapse, though like Europe it eventually shows up as an economic one.

China’s collapse, a word that should no longer surprise considering what’s happening in Europe, is now increasingly suggested by decadal indicators showing marked slowdowns in export manufacturing, higher defaults among SOEs, steeply rising past dues of banks, increasing loans by local and provincial governments, and anemic consumer retail sales. These indicators have trended down for a while so “imminent” may still be warranted.

But unless China can quickly rev up its exports at a point when the global economy itself is in serious recession (by collapsing prices and letting its currency depreciate despite raging inflation), its only hope for growth is in ramping up public investments fueled by money creation or a drawdown of its reserves. With China’s capital to GDP ratio now at a precarious 5 x, more capital offers limited prospects. But these measures only tell the late, “economic” part of the story.   

After investing in big infrastructure projects to prop up demand, and cutting back on environmentally or technically flawed projects hastily implemented to boost GDP, China looks increasingly like chasing after a mirage. For the next few years China’s overinvestment will become an albatross to growth, further stressing out its already undercapitalized banking system, which in turn will then cut down on small and medium term loans that represent China’s last hope for growth, having for too long delayed the strategic restructuring needed to free up consumer spending.

A long period of slow growth is now the payback for China’s delayed exit from mercantilism, with all the ills (of degraded environment, extreme inequality, and limited consumer choices) attendant to that system. Command economies can always buck trends as China has done for the last two decades, but they can only delay the inevitable reckoning. File it under a materialist system that, well, fell short of delivering the materialist Shangri la.

The Skinny on Global Recessions

This extended reference to China’s economic woes is done not to criticize it (its economic and business managers must rate at the top given the problems they had to contend with) but to let the reader better appreciate the kinds of problems that are now hobbling the major economies, and why snapping out of the present global malaise is not a matter of revving up exports or ramping up capital spending.

For one, it highlights a key aspect about the present economic slowdown – that whereas previous global recessions could count on offsetting growth performances, the present recession is one where all three major economic engines (EU-US-China) are in 0,-1,2 (comatose-stalled-slowdown) mode. The other third of the global economy would have to miraculously double their share to nullify the losses from these 3. Second, whereas most past recessions were triggered by a collapse in effective demand, the most pernicious feature of the present slump is the compression of purchasing power as banks and households de-lever their massive debt accumulated during the prior decades of growth (added to fiscal irresponsibility).

For the first time in over a half century, psychological and institutional incapacity render the economy impervious to monetary and Keynesian stimulus. Pessimism over bankruptcy and lost net worth is driving the economy over the cliff, which deficit spending or liquidity infusions cannot easily reverse. 

The Strange Case of Europe and the EU

With China’s economy all but ready for major surgery, and the US badly gasping for sharper, bigger and targeted growth-oriented intravenous infusions, the Eurozone is the world’s last and only hope for recovery. But after months of indecisive deliberations and hectoring about the “evils” of Greece-type bail outs while doing little to reverse member country budgetary infirmities, the Eurozone is now about to reap the fruits of a peculiar “double barrel” approach to resolving conundrums: its two top economic workhorses all but technically in a recession – France which barely grew at 0.1 % Italy and Germany at 0.2 %. With lending in Western Europe and the former Eastern Bloc crimped by bad bank balance sheets, the chance of their picking up the slack opened by France and Germany is negligible if not zero.

So for all intents and purposes the “comatose” description for the EU is, or has not been, too far off the mark and with US and China heading to their respective gurneys, that can only bode ill for the prospects of global recovery within five years. The words “Europe” and “malaise” are synonymous in this regard.

In fairness to the Eurozone countries, their leeway for solving economic problems are lashed by a tight straightjacket that without careful thought they hastily rushed into – forming a common currency union without ascertaining its workability amidst differing taxation and spending regimes of 17 sovereign and disparate cultures. Eurozone banking practices and standards which were to have been harmonized for common monetary policy to work effectively could not accommodate the member countries’ different rates of growth, inflation and stages of financial development, causing lack of coordination and control right in the very heart of financial policy which is what a common currency tries to facilitate.

The result is the present ECB reduced to a de facto Central Bank unable to monetarily work with 17 separate fiscal entities all of whom are beholden to local constituencies and vested interests. For anyone who has lived and worked in Europe as the author did in the 80s, this is Europe at its classically, dysfunctional, worst.

But Is Lack of Policy Coordination THE Reason for EU’s Malaise?

Those folks who have monitored these broad trends for other than quarterly or year-end assessments cannot help but wonder whether there is anything more, other than the parochial and exclusionist mindsets that are the standard indictments of its culture that explains why Europe is what it is today. There is in fact an honest answer to this question, although it tends to be ignored if not violently ridiculed by the elites, an effete group of faux glitterati and pseudo-intelligentsia, children of the Enlightenment who have long been in denial but who now must confront it unless they wish to become even more irrelevant and parasitical than they are now.

The real answer is that Europe is what it is today because it has turned its back on the roots which for centuries have been the nurturers and anchors of its vibrant, optimistic and creative culture, supplanting them with a culture of death and despair that now turns most ordinary decisions into epic struggles for survival. It is called atheistic humanism.

There is nothing novel or even earth-shaking with this statement, being the underlying theme of the writings of perceptive men like George Weigel (“The Cube and the Cathedral”) and Niall Ferguson (“Eurabia?” and “War of the World: 20th C. Conflict and the Descent of the West”). In their view, Europeans’ contempt for religious and secular tradition pushes them to the cult of the contemporary (Brague) which prevents their drawing the most obvious conclusions about the impending bankruptcy of their economic culture. One sign of this pessimism is its refusal to provide for its own defense, and engage in the most fundamental duty of raising the next generation, with the result that “Europe’s biggest problem is senescence” (Ferguson).

Once thought to be a rejection of and withdrawal from the most shameful aspects of their history, it is now believed instead to result from a deliberate denial of the transcendent roots of its religious traditions. If the reader wants proof, just look at the EU Constitution that Europeans adapted in June 2004 – at 70,000 words (7 times longer than the US Constitution) and not one word or phrase acknowledging Europe’s Christian patrimony.

The inevitable culmination of such beliefs (and the policies they give rise to) is the demographic suicide and pessimism about the future that is so rampant everywhere in the Europe of today. That attitude is inimical to achievement, generating the growth-paralyzing confusion now so rife in that Continent.

The Modern Economy’s Cornerstone in Faith

One reason why Europeans who see themselves as modern in both outlook and intellect have so little regard for transcendent values, is their arrogant belief that anything that cannot be sensibly grasped or even only comprehended by the mind in the context of past or contemporary experience, has no valid standing in reality and should therefore be discarded as pure fictions or figments of imagination. This empirical and physical criterion for what is real flies in the face most ordinary phenomena which many people who call themselves “reasonable”, take to without much doubt or incredulousness, such as most hypotheses about people’s motives or expectations about near term events.

If this skepticism was a mere result of hidden complexes or repressed behaviors, the same intellectual elites would readily adapt to them without question. No, the problem is much deeper, and a useful insight to it is a dialogue between the followers of the medieval friars Aquinas and Ockham, whose views about reality would determine the course of modern philosophy over the next five hundred years. That debate concerned the question of whether Platonic universal concepts can exist outside the mind, with those who deny it (the “Nominalists”) saying that universal ideas only exist inside our minds, meaning that there are no such things as “human nature” or “freedom”, only particulars like persons and the choices they make.

Pushed to its ultimate conclusion it means that there are no objectively good or bad things, only events; it is the heart of the materialistic creed that in totalitarian form has caused so much evil and mayhem during the 20th C. If the reader needs proof of the power of bad ideas and their consequences, this is it.

Those deeply into philosophy see in nominalism (and its modern day offshoots) a vain attempt to put an objective spin to what in essence are transcendental matters, finding its highest expression in the harsh empiricism of Hume, Locke or Hobbes, to whom there are no such things as morality; in the Positivist ideas of Comte who taught that science was humanity’s only reliable beacon; all the way to the “usefulness” criterion of Pragmatists Mead and Dewey. The problem with these ideas is that their bold claims of logical validity all run smack against the upper limits of the scientific method, which insists on complete un-falsifiability as the only legitimate test of validity. But as Kuhn said, scientific paradigms at best reflect the “objective” views of parties with vested interest in its progress.

In spite of this, philosophers’ bent on denying the scientific existence of universals have fought hard to win the mantle of scientific objectivity, with little sympathy from scientists. This is a warrant against those who work in the social sciences and humanities, who keep aspiring to scientific objectivity when studying human beings and their institutions; science itself is, at bottom a conjectural and culturally suffused endeavor.

This detour into the innards of scientific philosophy and theory of knowledge is crucial because its gross misunderstanding is what lies at the heart of all the problems that bug the modern economy – the claim that a scientific or empirical approach without consideration of transcendental values can help derive the best solutions for improving society and perfecting man. In this deformed interpretation of reality, only a values free approach to economics (or indeed to social sciences) can guarantee objectivity and optimal results.

The results of that arrogant assumption are now seen in the grotesquely deformed global economy. How else to explain the durability of such views in modern endeavors (politics, economics, management, etc.) except as a rejection of universal, transcendent values? Why should it surprise us to see the sorts of behaviors that led to the financial crisis, or that poverty continues amidst so much plenty? Or, for that matter, why does Europe continue to meander despite its claims to cultural and scientific enlightenment? If the reader is wondering whether he’d ever see a day when not believing in transcendental values could actually cause material society to crumble, he is not without company.

Europe’s malaise, which ultimately is rooted in inordinately high pride, makes its reversion to spiritual redemption too difficult, deferring any prospect for a return to the origins of its civilization. If the greatest drag to recovery is now Europe’s disarray and its dispirited economy, isn’t this proof that atheistic humanism abetted by the faux liberal view of compassion is the greatest threat to world order? [If a humbled EU is the warning that the Apocalypse referred to, then China would be wise to listen]. 

This is why the Pope’s recent visit to Spain to bring the message of hope and renewal was directed at the young who are, after all, both the inheritors and fount of such values, sending the message that there is no hope in secular humanism and atheism that reek of the stench of death and pessimism.

Isn’t it sweet irony and comeuppance that Europe’s (and the world’s) only hope of material survival now lies in the transcendent values which they vehemently deny?

[http://sonofbastiat.blogspot.com; copyrights VRR@NYC2011]  

Is Warren Buffett Smart?

By Son of Bastiat

“Financial genius is before the Fall” - John Kenneth Galbraith

Almost by universal acclaim, the answer would have to be a resounding Yes! For how else would it be responded to except affirmatively, based on what “popular wisdom” knows and says about the man:

a.  The world’s second or third wealthiest man (only Slim and Gates are wealthier according to Forbes). Better yet he found his way there through patient value digging, not market rigging

b.  A lot of this wealth is in liquid form, being shares in large, established publicly traded companies

c.  Unlike Gates or Slim whose wealth are tied up in narrow sectors (telecom, software) Buffett’s wealth is diversified across sectors that the first two wealthiest men can only dream of.

So, from the narrow standpoint of investment quality, Buffet is not only smart but astute in ways that the other two aren’t. The real question is: How does his “smartness” fair outside of this narrow area?

Probably Not As Smart As Supposed

We’re not talking about his stock picking abilities which based on his mistakes in later years have not been as legendary or exceptional as the ten baggers (like Coke, W. Post or Geico) of his early years in the stock market. We are also not referring to his mediocre currency derivative bets that turned out poorly (disclosed in the Annual B-H Shareholders’ Letter) that luckily got offset by spectacular stock futures option trades (from hedge fund gossip) which tells those who know how these markets work, that his prowess is now based more on selecting the right stock options traders and managers than any innate value creating abilities unlike during his early stock picking career. In fairness to the man, he eschews esoteric investment ideas beyond the OPT so he does not invest and hence eats the kind of losses that reckless hedge fund traders do with loads of chutzpah. This Graham disciple remains so today despite the fact that very volatile markets are not kind to value investors.

No, we are here talking about the fact that outside of his stock-picking (and manager’s selecting) skills, the man is a complete novice, if not a dodo in the larger economic environment of which investing is a tiny part. This is based on only one, but a very central aspect of that reality, the question of what taxes ought to be paid by people like him. As explained below, it reveals a lot about whether his smarts are innate or merely of the acquired kind. None of this is to denigrate businessmen the way enemies do.

The First signs of Cluelessness

Buffett has for years been quoted as saying that the rich are getting off from their obligation to pay a fairer share of the nation’s tax burden. Last July 7, in a series of interviews that the liberal media quickly picked up and disseminated (for a reason), he said that “I think the rich have a responsibility to pay higher taxes” followed by a statement that his wealthy friends “are paying lower taxes than the people who are serving the food” after an earlier disclosure that his personal tax rate was a mere 17.7 % compared to that of his receptionist of 30 %.

All these populist sounding nonsense fitted in so well with one of the left’s most durable and cherished myths, which is a war among classes, down to the fact that they are mostly wrong:

a.  Effective Tax Rates. From 2008 data supplied by the IRS itself, the share of Federal taxes in household income after deductions and exemptions amounted to 23.3 % for the top 1 % of all household income earners (above $ 380,000); 19 % for the top 10 % of household income earners (above 114,000); and 22.7 % for the top 0.1 % of household income earners ($ 2 MM and above). Contrast this with the 4 % paid by median income households ($ 35,000 and above), or the high, negative effective taxes paid by almost 60 % of all households who either receive incomes too low to be taxed, and/or receive some form of public assistance and entitlement. Talk about equity.

b.  Total Federal Tax Rates. Based on CBO data, the share of total Federal taxes (not just on income but on Social Security and Medicare payroll taxes) paid by middle class families ($ 34-50 thousand bracket) was 14.3 % of income, versus the 27.9 % and 29.5 % paid by the top 1 % and 5 % of all tax payers. Or the 32 % of all Federal taxes paid by the highest income earners. The reader is invited to calculate Gini concentration coefficients to show that these tax rates are indeed progressive.

c.  Effective Tax Rates After Considering the Source. In a 2010 IRS limited study of the taxes paid by a sample of 400 of the nation’s richest personal tax payers, the effective share of taxes to reported- income came to about 18 %. This is the study that Buffett probably referred to, as he would most likely have been one of those 400. Except that most if not all of these tax payers derived their income from investments, meaning that they reported incomes that had been taxed twice, either at the level of dividends (35 % on ordinary income) and capital gains (15 %) for a total tax burden closer to 45 % and not the 18 % that came out from the simplistic division of two numbers. Quite definitely not the level of expertise expected from a seasoned financial analyst like Buffett.

d.  Shelters, Loopholes and Tax Base Reduction Gimmicks. Buffett’s claims would have been more morally defensible had he eschewed the usual gimmicks used by the wealthy to reduce their basis and not just the incomes they were free to report (or defer to a lower tax rate phase in their lives as is commonly done). Buffett is being facetious in comparing his after tax position vis a vis the middle income classes for three reasons: as a wealthy tax payer he is able to take advantage of the tax shielding allowed on donations to charitable causes; he is able to effectively reduce his taxable base by booking most of his income as “carried interest” 20 % of which he can later pay taxes on under a favorable 15 %; and most outrageously of all, with the bulk of his assets already donated to a foundation, he is able to shield them from the high taxes during distribution. These tax preferences for the wealthy the middle income classes can only drool of, but which of course Buffett neither mentions in the same interviews, nor corrects on his own, if he was that convinced of its injustice, by just quietly writing a check for the underpayment towards the right tax amount.

More Evidence of Poor Smarts

If Mr. Buffett was really that smart (not just an astute investor and businessman) he would have figured out in ten minutes why a tax policy based on such idiosyncratic assumptions (ie, provided they were empirically right, which they aren’t), would eventually to the destruction of the very wealth that he along with millions of entrepreneurs labored so hard to create:

a.  Taxes have behavioral, not just fiscal impacts as any simpleton understands. Regional tax data reveal that states with low taxes attract rich and even middle income tax payers away from the high tax states and indeed explains the erosion in tax bases of such states as California and Wisconsin and the surge in tax receipts in tax advantaged states like Texas and Florida

b.  Ditto, but with even worse consequences when US wide data about rich tax filers are taken to consideration. In a study recently released by the IRS, it was found out that the number of rich tax filers shrunk 39 % between 2009 and 2010, representing a 42 % decline in tax receipts over the same period. The favorite explanation is of course the recession, but the really “smart” folks know the true reason, unfortunately they will be apocryphal tales for now until proven otherwise.

c.  Not just that “billionaires and millionaires” ceased to exist, but that those who stayed put in their respective domiciles, apparently indulged in less economically rewarding activities just exactly as predicted by the famous Laffer Curve (a backward looping effort vs. tax rate curve posited by the Chicago economist A. Laffer). A sample of b respondents should easily verify this. These data are not harbingers of the business climate that nurture future successes like him unless he wants it.

Given this obvious conclusion, Buffett’s plea to be assessed a higher tax can’t be viewed any other way than that he is not being smart. As far as can be seen, he is not an ideologue, or a Democratic partisan, and because he is too mature to play the sort of political games indulged in by folks like Obama, he must be pretty dumb to entertain and spouse these views. Ironically it was Galbraith, a liberal economist, who said that smart (finance) people tend to get dumb before they fall. Could he been thinking of W. Buffett?

Concluding Comments

Which brings us to the core question: Why is the liberal class making hay out of these nonsensical ideas (which they have to be dumb to even consider, unless they haul their worn out pleas for fairness-at-all costs)? The answer, once again, is simply this: by shaming the rich into agreeing to pay a higher fraction of their incomes, the path is clear to coercing the middle classes into paying higher taxes.

The fact is that 3.2 million middle income households earning above $ 200,000 paid $434 billion in 2009 taxes, the rich revenue lode that liberals like Obama, checkmated in their borrowing plans by conservatives have been eyeing to grab at all costs. Read that again: At All Costs, meaning, no matter if these folks will flee and take jobs along with them, and regardless of whether the outcome is fair as they like to loudly proclaim.

It is the very imbecility of this idea that has turned off the author from the liberal agenda, realizing that what they are about is mostly Big Government programs that everywhere has bankrupted countries and states.

None of these excuse Americans from having to pay higher taxes eventually, if only because of the mistakes committed by the politicians they have elected previously. But such policy decisions have to be done smartly, or else automatically (like what the author has advocated along the lines of Miller’s The 2 % Solution idea wherein a set portion of the nation’s output is set aside from welfare and social spending) to eliminate these kinds of politically abhorrent decisions that turn folks like Buffett into big disappointments especially in their twilight years. [Copyrights: The Son of Bastiat, VRR@NYC2011]  

The Requiem for the Welfare State

By Son of Bastiat
 

“When great evils happen, I am in the habit of looking out for what good may arise from them as consolations to us; and Providence has in fact established the order of things so that most evils are the means of producing some good” by Thomas Jefferson

Events of the past few days are rattling not just a few individuals, among them being those who worry about what the markets may be signaling about their job prospects (most recent graduates); the 50 or more million senior citizens who depend on (fixed) pensions and nothing else for their daily survival; and most heartbreakingly, the 15 or so million “lost” children, many of whom are orphans who have fallen back into the maws of poverty, innocent casualties of the on-going recession with nobody else to turn to for succor. These are the true victims of a welfare state that is in its last death throes; those who are tempted to think of the gyrating and plummeting indexes as ‘comeuppance” for rich folks’ unmitigated greed, need to be reminded that those lines are merely the visible images of the deep seated fears and anxieties of millions of ordinary folks who are getting caught in this visceral contest of ideas. The markets may rebound but the pains and sorrows will remain with these folks throughout their lifetimes.

That these cathartic events are still viewed with shock (and alarm) as if they were totally unexpected, as if there was any outcome other than what is now unfolding, is the outrage behind these. One detects it from what the politicians of the left and right are saying, but since lying and prevaricating is what all of them do in order to remain in power, they cannot be expected to say anything else. One would expect better from the media, but instead they have become purveyors of silliness and inanity, blaming the very messengers (but not the message) they should have welcomed if they were true advocates of what’s good for society. Caught on the wrong side at exactly the moment when history turned against the welfare state, but too proud to recant the nonsense they have been peddling lest they get exposed for incompetence and bias, they are now unable to execute an honorable retreat and thus have to engage in name calling and blaming their fallen idols who were just as clueless about what’s going on.

What, it may be asked, was so ineluctable with the fall of the welfare state (which stands for a society that depends on government assistance for much of its own survival)? The only true and honest (if politically incorrect) answer is that it was never meant to function as the safety net for the poor that social theorists and welfare advocates have romanticized for it. The welfare state which in his cold, calculating fashion the Prussian Chancellor Otto von Bismarck created back in the mid-1880s to win the hearts and minds of industrial workers in a bid to preempt his political opponents (the Socialists) from thwarting his ambitious schemes to unify Europe under the Northern German alliance, became the grandiose solution to a problem that did not then exist (at least not in Germany) or if it did, should have required more careful thought. From its creation and up to now the welfare state has been used to secure power, and like all flawed births, their midwives will never grasp the depravity of their creation.

With the advent of the Progressive Era the passage of social legislation increased the heavy hand of government in the welfare state. A State heavily involved in social reform is neither foreordained nor the only option available to society in caring for its less fortunate. In the Europe of the late 19^th C. and America of the early 20^th C. private beneficence and charitable institutions took up most of the burden of caring for the poor. It is strange to read how, during the Guilded Age, the sick poor in America were cared for in private hospitals supported largely by wealthy families and religious houses just like it was during the medieval ages. Only when politicians realized the huge vote drawing power of limitless government largesse did the State become the principal provider of welfare assistance. Not surprisingly, this period also saw the expansion of government, and inevitably the first time that income taxes were levied in American history. Even Bismarck would have been appalled at what became of his handiwork.

The design of the welfare state unfortunately collides with three harsh realities. One is that social spending which is unrestrained by limits and accountabilities eventually turn into a state of commons beset by a tendency to spin out of control. A second is that benefits too generously dispensed create and nourish a culture of entitlement and dependence that view attempts at reform as “unfair, mean-spirited and unjust” which effectively prevents self-correction. Because they make up such a huge vote rich constituency that politicians dare not ignore, these programs just keep growing regardless of constraints elsewhere. The last is that the welfare society is a resource consuming sector, dependent on the productive one for sustenance. Expanding welfare faster than the productive sector saps the latter of resources it needs to grow; worse, extracting the wherewithal through coercive taxes and regulations tend to impair the latter’s health. 

The welfare economy’s unsustainability would have become a reality over time but three forces that came in with the 20^th Century accelerated its demise:

a). Internet and Web Technologies. These technologies leveled the playing field that used to be heavily dominated by big entities with capital, information and contacts. When opportunities can be found at the touch of a key, options multiply and the advantages and coercive policies quickly fade into nothing.

b). Globalization. When factors of production like knowhow and capital are free to move anywhere they are welcome, economic differences disappear, equilibrating towards the Law of One Price. There is no reason for US (or European) workers to be paid $ 45 per hour excluding benefits to do what laborers in emerging countries can do for a fifth of it, daily. Suddenly the rationale for a safety net is blown away.

c). Erosion of Work Ethic and Moral Values. There is no sense in denying what right thinking individuals have known but somehow glossed over for fear of being viewed as “woozy”: that societal deterioration usually follows a decline in its moral values. This is a view that is now finding confirmation in European and US work ethics that in part explains such dysfunctions as Medicare overuse and the housing crash.

When things as earth shaking as these do not register in the consciousness of a society and its leaders, the stage is pretty much set for a dramatic fall, usually after a series of warnings. One such warning was the crisis of 2008 which can be viewed as the denouement of a secular tendency towards economic volatility first manifested during the oil crisis of 1973. Another recent warning that has longer roots is the current debt crisis, a direct effect of the unsustainability of big public spending that began during the Great Society and New Frontier Eras and peaked with Obama. Soon the world will see the onset of the Great Contraction, itself a reprise of the Great Crash of 1930s. One would think that the politicians and thought leaders would have detected these warning signs and “connected the dots” especially in the wake of the Nov. 2010 elections which telegraphed that ordinary folks wanted a reset because the political economy was on an unsustainable path. Despite all these, how did they react to the recent crash that followed the US credit rating downgrade? Derision, name calling and blame gaming, with the odium reserved for groups that brought to the fore serious problems that nobody dared to raise.

None of this leaves conservatives off the hook. For their lack of sufficient social conscience and obsession with materialism, they have been just as guilty in exacerbating the social malaise that supplied liberals with the ammunition and passion to press for unbridled government spending. Most of their assistance comes in the form of superficial rather than meaningful programs to help the poor. But being the more pragmatic of the two camps, conservatives would, if they were incentivized, be more capable of helping at a scale and variety needed by the poor, with none of the liberals’ moral delusions and politicians’ manipulative-ness. By factoring in the cost of supporting social spending in their investment calculations, they can do a better job of designing sustainable welfare programs that run efficiently and without coercion, though this would still leave giving at their discretion, perhaps the price of freedom. The ideal is for such programs to be set at a percentage of economic benefits, in advance and automatically built in as a deliberate policy to support the poor. 

Until the revision of the economic structure takes place, the overriding problem of our times is how to help the poor without smothering their spirit and turning off that spark of innovation that makes charity a pleasant obligation to face instead of a burden to be evaded or imposed by fiat. Unless this is achieved, as Jefferson says in his quote, man has to suffer tremendously to figure out a reasonable way to do it. [VRR@NYC2011]

Why Not Put Welfare on Auto-Pilot?

“Plus ca change, plus c’est la meme chose” – French for “something’s got to give”
By Vincent Ricasio

Yesterday’s devastating 260 points decline in the Dow, the 7^th or 8^th 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]

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