Wednesday, January 14, 2009
While it should now be quite clear to everybody involved that the mid-decade "wealth creation" seen in the U.S. was an ephemeral event, our path forward now murkier than it's been in many decades, one of the most astonishing aspects of our "housing boom heyday" is that there were few calls to do much of anything about the country's long-term problems.
As tax revenues were filling state and government coffers, there was nary a call to address the adverse impact on the nation's fiscal condition due to retiring baby boomers. For years, these problems have been well-known, yet intractable, impossible to solve during the lean years, only occasionally confronted during the good years, but always with the same result - do nothing.
A few years back, the federal government was spending money hand-over-fist, fighting a war it turns out it didn't have to fight, though, these sums of money pale in comparison to the money being spent now to fight the economic downturn.
Meanwhile, after the near-death experience following the 2001 recession, during the last few years of the housing boom, state governments were busy projecting tax revenues far into the future, trying desperately to figure out just how they were going to spend all that money.
So, it comes as something of a surprise that the author of The Rise and Fall of Great Powers and self described "declinist" Paul Kennedy should strike an optimist tone in this editorial in today's Wall Street Journal. Not overly optimist, mind you, but optimistic nonetheless.
As the world stumbles from the truly horrible year of 2008 into the very scary year of 2009, there seems, on the face of it, many reasons for the foes of America to think that the world's number one power will take heavier hits than most other big nations. Those reasons will be outlined below.In the words of Carl Spackler from the 1980 movie classic Caddyshack:
The first reason, surely, is the U.S.'s truly exceptional budgetary and trade deficits. There is nothing else in the world like them in absolute measures and, even when calculated in proportion to national income, the percentages look closer to those you might expect from Iceland or some poorly run Third World economy. To my mind, the projected U.S. fiscal deficits for 2009 and beyond are scary, and I am amazed that so few congressmen recognize the fact as they collectively stampede towards the door entitled "fiscal stimulus."
The planned imbalances are worrying for three reasons. The first is because the total projections have been changing so fast, always in a gloomier direction. I have never, in 40 years of reading into the economics of the Great Powers, seen the figures moved so often, and in such vast proportions. Clearly, some people do believe that Washington is simply a printing machine.
The second reason all this is scary is because no one seems to be certain how usefully (or fecklessly) this money will be applied. I wish Barack Obama's administration all the best, but I am frightened by the prospect that he and his team will feel under such time pressures as to shovel out the money without adequate precautions, and that lots of it will slip into the wrong hands. The news in the press last week that lobbyists were pouring into Washington to make the case for whatever industry, interest group, or service sector they have been hired to represent made my heart sink. Printing lots of unsecured money is bad enough. Frittering it away on courtiers is worse.
The third thing I'm really scared about is that we'll likely have very little money ourselves to pay for the Treasury bonds that are going to be issued, in tens of billions each month, in the years ahead. Sure, some investment firms, bruised by their irrational exuberance for equities and commodities, will take up a certain amount of Treasury issues even at a ridiculously low (or no) rate of return. But that will not cover an estimated budget deficit of $1.2 trillion in 2009.
Never mind, I am told, the foreigners will pay gladly for that paper. This notion makes me queasy. In the first place, it is (without its advocates ever acknowledging it) a dreadful sign of America's relative decline. If you have seen Clint Eastwood's poignant war movie "Flags of Our Fathers," you also will have been stirred by the scenes where the three bewildered Iwo Jima veterans are dragged all over the country to beg the cheering audiences: "Buy American Bonds!"
In this focus upon chronic fiscal deficits and military overstretch, certain positive measures of American strength tend to get pushed into the shadows (and perhaps should be given more light at another time). This country possesses tremendous advantages compared to other great powers in its demographics, its land-to-people ratio, its raw materials, its research universities and laboratories, its flexible work force, etc. These strengths have been overshadowed during a near-decade of political irresponsibility in Washington, rampant greed on Wall Street and its outliers, and excessive military ventures abroad.
Things could have gone better, although that is not to argue that America can return to the preeminence it held in, say, President Dwight Eisenhower's day. The global tectonic power shifts, towards Asia and away from the West, seem hard to reverse. But sensible policies agreed to by the U.S. Congress and the White House could certainly help to make those historical transformations less bumpy, less violent, and much less unpleasant. That's not a bad thought, even for a "declinist" like me.
So we got that goin' for us, which is nice.