The Great Deformation (113 page)

In truth, with today's E-Z Pass technology all significant highways, interchanges, secondary roads, and bridges could be funded with user charges. It is virtually certain that such a system would lead to improved transportation system efficiency and arguably an enhancement of national economic productivity. It is also certain that aggregate spending for highways would fall, not rise, because uneconomic use of the highway system, especially the wear and tear on highway surfaces caused by heavy trucks, would be sharply curtailed. Indeed, use of time-of-day pricing on congested
urban freeways would also expand “effective capacity” dramatically by flattening out traffic loads.

Like everything else in the Obama stimulus, the $30 billion of highway money thus amounted to “borrow and spend,” not productive public investment. More often than not, stimulus money went to surface repair of roads that didn't need it, or replacement of rural bridges that have virtually no traffic, or the construction of new highway interchanges that will reconnect sparsely trafficked secondary roads out in the countryside. Pyramid building would have accomplished the same thing.

The real pyramid building in the Obama stimulus, of course, was the $20 billion or so for transit and light rail. Forty-five years of mucking around with the abomination known as Amtrak proves that cross-country passenger rail can never be economically viable because it cannot compete with air travel.

Presently, every single ticket sold on the Sunset Limited from New Orleans to Los Angeles, for example, requires a $500 subsidy—more than coach airfares on the same route. Indeed, Amtrak's long-distance routes account for only 15 percent of its passengers but 80 percent of its red ink; that is, about $1 billion in annual subsidies go to 4 million citizens who patronize Amtrak's hopelessly uneconomic long-distance routes. These windfalls are dispensed without regard to ability to pay, but the intended beneficiaries are not the passengers anyway; the subsidies are meant to keep overpaid, feather-bedded union jobs on the Amtrak payroll.

The only potentially viable part of the public rail dream relates to dense urban corridors between large and nearby urban centers: Philadelphia and New York City or Los Angeles and San Francisco. Yet if there is one truism about interurban light rail it is that it must be paid for by direct users and regional transit authorities from local taxation.

This stems from the fact that the productivity benefits to business travelers in reduced travel time are modest, if even measurable. On the other hand, the potential to overbuild, overschedule, and overman these systems to the benefit of land speculators, developers, construction contractors, railcar suppliers, transit unions, and leisure travelers is enormous, most especially when much or all of the cost consists of other taxpayers' money.

Federal funding of interurban rail like the dozen projects started in the stimulus bill, therefore, is a sure-fire recipe for waste of scarce fiscal resources and reduced national productivity. This truth has been proven decisively by forty years of federal operating and capital subsidies for local mass transit. Time and again, systems have been overbuilt, money-losing lines have stayed open, transit union workers have gotten way overpaid,
and local politicians have been encouraged to demagogue for more service and lower fares, and to demand Washington make up the shortfalls.

From an economic equity viewpoint, the argument for federal funding of regional light rail is especially perverse. Most of it would be built in the highest income regions of the United States—California and the Eastern Seaboard—and paid for by taxpayers in the lower income and less densely populated interior. Worse still, this redistribution of fiscal resources from the poorer regions to the richer areas would incite still another giant Washington logrolling system.

Indeed, chronic battles over tens of billions in regional transit funding would only further dissipate the nation's capacity for fiscal governance, even as it undermined efficiency, accountability, and care in the local management and operation of these systems. Federal funding of regional rail is thus not a productive form of public investment. It is merely another excuse for deficit spending, and another opportunity for K Street to prosper at the expense of the innocent public.

REACTIONARY WELFARE, PROGRESSIVE STYLE

At the end of the day, the Obama stimulus bill was a massively wasteful and unaffordable tribute to the textbooks written long ago and in a different time by the vicar's uncles. Yet the stampede on Capitol Hill and K Street to fill in the blanks on the stimulus napkin caused Washington to give short shrift to the true and urgent task under the circumstances; namely, the need to shore up and refocus the social safety net.

Four years after the crisis, median family income has fallen by 10 percent in real terms. Likewise, as documented in
chapter 31
, the number of full-time breadwinner jobs in the US economy is still down by 5 million; that is, it is more than 8 percent below its late 2007 level. In short, the Main Street economy has been failing for years, and now the massive debt deflation under way will aggravate that condition enormously, leaving millions of citizens to depend upon intermittent employment in low-paying part-time jobs or to fall back on family, friends, charity, or nothing at all.

Yet the total amount of funding for means-tested assistance in the Obama stimulus was just $28 billion, or 3.5 percent, of the $800 billion package. Funding for unneeded bridges, interchanges, and road repair got more money than the combined total for food stamps, the earned income tax credit, and federal grants for public assistance and WIC (the health and nutrition program for women, infants, and children). This outcome was telling because it demonstrates that trapped in its Keynesian fog, the nation's so-called progressive party cannot see that the overwhelming task of national governance for years to come will be tending and funding the
safety net. The challenge will be to systematically and forthrightly address the swelling level of human needs, but to do so in a manner that is stringently targeted on means-tested programs and which does not encourage dependency and freeloading.

In fact, however, the de facto policy of the Obama stimulus and subsequent renewals has been to throw money at non-means-tested programs, particularly extended unemployment benefits and Social Security disability. Since September 2008, approximately $300 billion has been spent on unemployment insurance benefits but upward of one-third of that has gone to affluent workers laid off from jobs in finance, real estate, and other white-collar occupations or to two-earner families with high combined incomes. At the same time, there can be no doubt that ninety-nine weeks of benefits have been a deterrent to reemployment, even if in part-time jobs or lower-paying positions.

Likewise, since the official end of the recession in June 2009 there have been 3.5 million new cases on the disability benefits rolls, a figure which towers over the 200,000 breadwinner jobs restored during that period, and which is nearly double the caseload growth rate prior to the crisis. In short, the disability benefit has become a backdoor safety net, and in the process is encouraging millions of desperate citizens to abuse the program and become permanent dependents of the state.

Rather than retargeting resources through the earned income tax credit (EITC) or converting food stamps into a proper means-tested cash transfer system, however, the progressive policy agenda remains ensnared in a time warp; it digs Uncle Sam ever deeper into debt with stimulus boondoggles, and even justifies massive supplemental funding for grossly inefficient social insurance programs as a stimulus to consumer demand. Yet in the context of today's crisis of fiscal solvency, these measures to bolster the macroeconomy rather than transfer societal resources directly to needy citizens and families are reactionary.

The old-time New Deal–like initiatives revived by Bernanke's false depression call, in fact, have mobilized special interest lobbies to feast at the public trough like never before. Consequently, Washington has been dragged ever deeper into fiscal paralysis and incapacity to perform functions that are actually needed, such as funding an adequate national safety net. Worse still, all these misbegotten depression-fighting measures have destroyed what remained of an honest fiscal culture.

CHAPTER 30

 

T
HE BAILOUT OF CHRYSLER AND GENERAL MOTORS (GM) WAS UT
terly unnecessary and did not save any auto jobs; it just reshuffled them from rising plants in right-to-work (red) states to dying plants in the UAW (blue) states. But the auto bailouts were more than just another policy error which emerged from the BlackBerry Panic. They were, in fact, the final crushing blow to free market capitalism.

The auto bailouts corrupted political discourse beyond repair, elevating official mendacity and crony capitalist deceit to a new level. And as Washington plunged into a sweeping rearrangement of both the nation's largest industry and its financial overlay, it was a Republican administration which led the bailout bandwagon, thereby leaving the public purse vulnerable to crony capitalist raids for the permanent future.

The auto bailout was initiated by the nation's bailout crazed de facto president, Hank Paulson, based on the specious claim that a million jobs would be lost from an industry which, according to the Bureau of Labor Statistics (BLS), employed only 750,000 workers. At the time it was self-evident that the real issue was job allocation, not job loss. Up to half of this BLS figure for manufacturing jobs in the “motor vehicle and parts” industry was in the new auto belt of Kentucky, Tennessee, Mississippi, Alabama, Georgia, and South Carolina. It was absolutely the case that the auto OEMs involved—Toyota, Nissan, Hyundai, BMW, and Mercedes-Benz—would have gained sales and jobs had Chrysler and GM been allowed to meet their maker in bankruptcy court.

So the bipartisan embrace of the auto bailout changed everything. The pieces and parts of the national economy would now become fair game for a perpetual Washington food fight. Yet a government which is responsible for every bob and weave of the entire national economy will quickly
succumb to pure crony capitalism, a régime which cannot avoid eventual fiscal insolvency and the destruction of any semblance of a free market economy.

Most importantly, it means a fatal corruption of political democracy. Ironically, President Obama did not earn reelection in 2012. He bought a second term with taxpayer dollars in the auto precincts of Ohio, Michigan, and Wisconsin, and did so under the cover of a GOP-endorsed bailout. But the terrible lies about the bailout's necessity, repeated over and over by the Democratic campaign, constituted far more than partisan cant. In fact, they represented the fundamental confusion about economic events and conditions which have arisen from the Fed's destructive régime of financial repression and financial markets manipulation.

THE HOARY LEGENDS OF THE GM BAILOUT

The hoary urban legend that General Motors could not get a debtor in possession loan (DIP) at the time of the Wall Street meltdown is a dramatic illustration of the ill effects from the Fed's destruction of interest rate price signals. True enough, GM could not get bankruptcy financing at 5 percent. But under the conditions which existed in December 2008, the job of the free market was to treat financial train wrecks like GM with stringent terms and interest rates commensurate with their risk.

As it happened, however, any memory of the function of free market interest rates among policy makers had long ago vanished. So after the Senate had properly rejected aid to Detroit, Paulson struck again, on the apparent theory that if GM couldn't get cheap financing fair and square in the marketplace, then it was the taxpayer's job to step into the breach.

As he himself made clear in his own telling of the episode, GM was never asked to scour the earth for DIP financing, even if available terms were onerous. In fact, Secretary Paulson never even asked GM to prove that it had tried.

For all practical purposes the US Treasury Department, armed with the massive firepower and open-ended authority of TARP, had staged an economic coup d'état. Paulson had just returned from a ten-day trip to China where he had been mesmerized by the miracles of Red Capitalism, and was not about to see the stock market in general, and Goldman's stock in particular, take another beating.

Never mind that GM was a veritable fount of corporate incompetence and long-standing financial scams, and that it could no longer dodge the harsh and messy resolution of the marketplace and bankruptcy courts. The US economy was now being run by the writ of a “can do” power tripper who had no clue that deal making Wall Street style was a frightfully dangerous
way to make public policy, and a lethal blow to the integrity and resilience of free market capitalism.

So without the benefit of any analysis whatsoever, the hapless lame duck in the Oval Office wolfed down a hot dog for lunch while his treasury secretary instructed him to “sign here” on a $13 billion TARP check to GM. It thus transpired that the most important test of free market capitalism in modern times was cancelled for the ephemeral reason that the treasury secretary did not want the stock market to open the next morning—Friday, December 12, 2008—on a down note.

Paulson's rendition of this Rubicon moment is downright embarrassing in its myopic lack of perspective. If the Bush administration didn't rescue Detroit from its own folly, “the GOP risked being labeled the party of Herbert Hoover,” he prattled on, implying that the nation's taxpayers existed for the political convenience of the party in power.