The Great Deformation (102 page)

As a result, the nation is now saddled with vastly more capacity—malls, lodging, restaurants, car dealerships, office buildings, movie houses—than can be justified by the sustainable income and spending capacity of the American economy. Ironically, the monetary central planners take this overhang as evidence of insufficient “demand” and therefore a need for more money printing. Like nineteenth century practitioners of the bleeding cure, they single-mindedly press ahead toward the patient's eventual demise.

PART V

SUNDOWN IN AMERICA:
THE END OF FREE MARKETS
AND DEMOCRACY

 

CHAPTER 27

 

T
HE 2012 PRESIDENTIAL ELECTION SIGNALED THE ONSET OF SUN
down in America, and not merely because an avowed big-spending statist won the race. Rather, it's because the Republican candidate proved in words and lifelong deeds that there is no conservative party left in America—at least not one that is willing or able to defend sound money, free markets, and fiscal rectitude. So the drift into the crony capitalist end game will now accelerate, suffocating what remains of free market prosperity and honest political democracy.

Mitt Romney made numerous revelatory choices in his quest for the Oval Office and they unfailingly showed that the old-time conservative economics cannot be revived. Gerry Ford would never have bailed out GM, and Bill Simon would have busted down the door to the Oval Office if his president had even mentioned it. And for good reason. As will be seen in
chapter 30
, the auto bailout was a frontal assault on the free market: the GOP candidate should have denounced it from the rooftops as an $80 billion theft from innocent taxpayers.

Yet candidate Romney tried to bury the issue. Mumbling a tortured retreat from his 2008 “Let Detroit Go Bankrupt” editorial, he insinuated that his disagreement with Obama was on the bankruptcy venue, not the bailout. The reason that Romney did not take what was a defining issue of our times to the nationwide electorate was obvious enough: his handlers believed that finessing the auto bailout was crucial to Ohio and to the outcome in the electoral college.

And that it why all is lost. The bailout “saved” perhaps 10,000 jobs in Ohio, a figure that represents two-tenths of 1 percent of the 5 million votes cast there. So Romney's de facto flip-flop on the auto bailout was both a
profile in cowardice and proof that the Republican political apparatus believes that the party's core free market principle is an electoral loser.

Romney's assault on fiscal rectitude, likewise, would have made Eisenhower shudder and George Humphrey turn apoplectic. The true issue of the 2012 campaign was the exploding national debt, and the true facts were that honest ten-year fiscal projections produced cumulative deficits of $20 trillion. As will be seen in
chapter 33
, that would be the mathematical result of Republican tax policy and the welfare state–warfare state status quo based on an “unrosy” scenario; that is, a ten-year forecast identical to the US economy's actual performance during the last ten years.

Facing this terminal challenge to fiscal solvency, Mitt Romney choose to double down on the GOP's tax-cut elixir, proposing a 20 percent rate reduction on top of the Bush tax cuts which had already added trillions to the national debt. K Street greeted with mirthful nonchalance his ritual promise to recoup the $5 trillion revenue loss by closing tax “loopholes,” duly noting that the candidate did not name a single one of them out loud.

ROMNEY'S RYAN COP-OUT

But Romney's true fiscal dereliction was on the spending side of the budget, where the welfare state and warfare state status quo got a hearty embrace. The proof, oddly enough, was in Romney's adoption of the Ryan budget as his fiscal plan and its author as his running mate. Notwithstanding Democratic arm-waving, the Ryan budget provided that not a single recipient of Social Security or Medicare would face benefit cuts for a decade.

The GOP's fiscal plan of 2012 for all practical purposes, therefore, gave final bipartisan validation to FDR's eighty-year-old mistake in enacting social insurance. So doing, it put the lie to Ryan's pretensions to being the scourge of Big Government. It also revealed that what passed for the GOP anti-spending agenda was a brutal, unprincipled attack on the means-tested safety net, a position that candidate Romney famously and perhaps inadvertently crystallized in his lament about the 47 percent.

The ten-year projection for total domestic spending at election time was about $33 trillion and its internals illuminate why the Ryan budget amounted to a declaration of class war, even if its earnest author was simply trying to come up with a big number for budget “savings.” The social insurance core of the welfare state, Social Security and Medicare, account for nearly $19 trillion, or 55 percent, of all projected domestic spending in the next decade. Hiding behind the phony rigmarole of trust funds and insurance argot, Ryan gave social insurance a free pass through 2022, notwithstanding that trillions of this huge expenditure would go to upper-income and wealthy retires who hadn't earned it and didn't need it.

By contrast, means-tested programs including food stamps, Medicaid, Supplemental Security Income, and the earned-income tax credit account for just $7 trillion, or 22 percent, of projected domestic spending under current law. Upon being slammed by Ryan's fiscal meat ax, however, the current law figure would have been cut by 30 percent over the next ten years. This meant that citizens who had (mostly) proved they deserved help from the state and were by definition on the ragged edge of financial survival would take a $2 trillion punch in the chops.

Ryan and his fellow travelers have never presented any evidence of sloppy eligibility criteria or outright cheating to the tune of 30 percent or even 3 percent. Nor have they made any pretense of an effort to selectively repair and strengthen the safety net as we did in the 1981 Reagan entitlement reforms. Instead, Ryan's $2 trillion assault on the means-tested safety net was simply a goal-seeked number: it functioned as a “plug” to affect the appearance of fiscal retrenchment, while being gussied up as a block grant “reform.” Under it, states would take over medical, food, and income assistance to the poor, albeit with 30 percent less money.

That was a shameful ruse. No governor was any better equipped to find economies in nursing home costs or emergency room visits than current federal policy makers and administrators. The means-tested safety net is just not an issue of federalism; it's a question of how to design and deliver welfare benefits in a manner that is efficient and fair, that minimizes moral hazard, and most importantly, avoids capture by crony-capitalist vendors.

As seen, Milton Friedman had the right answer, and it involved an all-cash, single-benefit system integrated with the federal income tax, not an arbitrary dump of Washington's most justifiable function on fifty ill-equipped state governments. In truth, the block grant cop-out was the smoking-gun evidence that the Romney-Ryan Republicans had reached a state of intellectual bankruptcy.

SOCIAL INSURANCE AND DEFENSE:

ROMNEY'S BIG GOVERNMENT

Indeed, having doubled down on another massive dose of revenue depletion ($5 trillion), Romney was in the same position as the Reagan administration had been in February 1981 when it launched its own giant tax-cut program; namely, it was obligated to make a frontal assault on the social insurance core of the domestic budget to sustain fiscal balance.

Plain and simple, social insurance is the true essence of Washington's “overspending” problem. The $19 trillion slated for it over the next decade is what makes the welfare state too corpulent, and also demonstrates why universal entitlements are offensive to the very idea of a limited state.

But the Romney-Ryan deficit howlers offered no “Schweiker plan” (see
chapter 6
) or any other measure to stop the massive outflow of Social Security and Medicare benefit payments to affluent retirees. Never had there been a better time to insist on a sweeping means test. After all, affluent social insurance recipients were the very epicenter of voters who believed most passionately that trillion-dollar deficits were a deadly economic threat and who thought voting for Obama was beyond the pale. Indeed, championing a means test for social insurance would have put Romney on the right side of the class war, rather than being postured as wanting to throw grannie out in the snow to fund tax cuts for billionaires.

Yet Romney-Ryan offered a spending cure which was both cowardly and a legislative nonstarter. The proposed $2 trillion in savings over ten years from shredding the means-tested safety net was entirely illusory; as indicated, it depended upon enactment of sweeping block grants that would massively shortchange state and local budgets that were already teetering on fiscal collapse. Needless to say, forty years of history going back to Nixon's abortive “special revenue sharing” reforms demonstrated this kind of lopsided swap within the federal system would never see the light of day. In short, the Romney-Ryan fiscal plan was the ultimate incarnation of the GOP's embrace of free lunch fiscal policy.

And that wasn't all. Candidate Romney also chose to surround himself with neo-con foreign policy advisors, led by the bombastic John Bolton, former Bush ambassador to the UN and warmonger extraordinaire. The Romney national security budget therefore called for spending $800 billion annually in order to sustain and modernize the machinery of invasion and occupation required by the aggressive ambitions of neo-con foreign policy.

In inflation-adjusted dollars the Romney neo-con defense plan thus amounted to 200 percent of Eisenhower's final budget, a plan which had been set against a real nuclear-armed enemy and which had also had been wrapped in a prophetic warning about budget aggrandizement by the military-industrial complex. Had Ike been here today, he would have sent Bolton and his posse of neo-cons packing and put candidate Romney through a heavy remedial education on the limited uses of military power in a world where the United States has no industrial state enemies.

In all, it can be well and truly said that the 2012 election campaign of the Romney-Ryan ticket brought fiscal sundown to America. In what was a “last chance” election to confront the looming fiscal calamity, the purported conservative party served up a potpourri of budgetary flimflam, delusion, and lies. In so doing, it left the American electorate in the dark with respect to the dire challenges and painful austerity which lies ahead. Likewise, the congressional Republicans who survived the Romney defeat had sought no
mandate that was remotely geared to fixing the nation's giant fiscal gap. Instead, they merely promised to continue tilting at Big Government windmills and repeating ritual incantations about tax cuts for job creators.

Fiscal governance has thus been reduced to a doomsday machine. With the voice of the old-time fiscal religion terminally silenced, there is no counterpoint to the din of bastardized Keynesianism emanating from both parties; that is, the shibboleth that the US economy is too weak to ask either the “job creators” or the “consumption units,” as the case may be on the respective sides of the partisan aisle, to shoulder the taxes needed to pay the government's bills. Indeed, after the November election the initial rounds of the so-called fiscal cliff battle amply demonstrated that Washington is mired in dysfunction and drifting into national insolvency.

ROMNEY'S WALL STREET SHILLS

Candidate Mitt Romney's whiff on the looming fiscal crisis, however, was just a warm up. Even more consequential was his complete failure to grasp that free market capitalism was failing in America because it had been fatally corrupted by two decades of Wall Street coddling by the Fed and nearly four decades of worldwide floating money and central bank monetary inflation. To be sure, he had called for Bernanke's replacement during the primary campaign in order, apparently, to parry Governor Rick Perry's fusillade in the direction of the Eccles Building.

But Romney's choice of his top economic advisor was proof that he was dream-walking in the great financial bubble that had been fostered by the nation's central bankers. According to the headline of a
New York Times
profile, the candidate's “Go-To-Economist” and author of the campaign's official economic platform was one R. Glenn Hubbard, dean of the Columbia Business School, and George W. Bush's chief economic advisor and architect of the 2001–2003 “Bush tax cuts.” Not surprisingly, Hubbard was of the opinion that the Wall Street–coddling policies of the Greenspan-Bernanke era had been a roaring success. He suggested that Romney should consider keeping Bernanke on board because he had been a “model technocrat” who was owed a “pat on the back.”

As indicated earlier, the single most noxious deformation of bubble finance had been the $5 trillion MEW spree of the nation's household sector. It had been the proximate source of the consumption binge that left American families buried in mortgage debt and the residential housing industry in smoldering ruins.

Yet Hubbard had been an unabashed proponent of MEW. Near the very top of the housing bubble and after gross mortgage financings had hit the freakish level of $5.3 trillion, or 40 percent of GDP, in the spring of 2003,
Hubbard opined that the “revolution in housing finance” which had led to “large increases in mortgage equity withdrawal” had been a salutary development; it was “one reason why consumer spending held up well” during his tenure as chairman of the White House Council of Economic Advisers (CEA).