The Great Deformation (125 page)

Eventually there arose the Karl Rove–
Fox News
variation, and it is no less statist despite all its anti-government arm waving. Its Lafferite predicate is that by not paying its bills, Washington can cause the private economy to grow faster! Like any free lunch panacea, of course, such deficit-driven
“growth” will also lead to fiscal and momentary collapse as surely as would the perma-deficits of the Democrat “big spenders.”

To be sure, Republicans insist that the magic lies in “incentives” not “deficits,” but there is not a modicum of evidence to support the Laffer napkin at the current (moderate) range of marginal income tax rates. So in defiance of every historical tradition of sound public finance, the GOP became hooked on the patent medicine of tax cuts.

After stealing credit for the economic recovery from Volcker's victory over inflation, the so-called conservative party actually became a well-spring of statist schemes and cures for goosing the private economy by turning the tax code into an instrument of economic management. During the last thirty years, therefore, Republican politicians have rarely met a tax cut they couldn't embrace. In the cause of economic stimulus through “incentives” for the prosperous classes, they cut taxes on income, capital gains, dividends, estates, carried interest, machinery investments, small business, green energy, black energy, cow pasture energy, and countless more “stimulants” that K Street had on offer.

The GOP apostasy reached an absurd extreme in the 2012 election, when candidate Romney promised to use his four-year term not to balance the budget, but to stump up 12 million new jobs. Herbert Hoover, who well understood the imperative need to keep the state and the private economy separated by a sturdy fence, was doubtless rolling in his grave. For in proposing $5 trillion in additional deficit-financed tax cuts, the GOP candidate was thoroughly conflating the two realms—promising to improve on the private economy's delivery of jobs and GDP by mortgaging the public sector's balance sheet.

In earlier times, Romney's plan would have been seen as crude pandering: an election-year gambit to relieve current American taxpayers of their duty to pay the cost of the government they had elected. But no longer. Giant fiscal deficits “as far as the eye can see” had been properly viewed as an ominous threat when they unexpectedly flared up in late 1981. By contrast, the allegedly “courageous” Ryan plan for fiscal 2013 did not sweat giant budget deficits for a moment: it did not get around to a balanced budget, even on paper, until a quarter century later.

If there was any doubt that the nation has two fiscal free lunch parties, the wanton profligacy of the George W. Bush era had already removed it. Still, the case was sealed by the sheer farce of the 2012 campaign in which Obama couldn't name any tax he would raise except on the 2 percent, and Mitt Romney couldn't say out loud a single federal program he would cut other than Big Bird's stipend.

When every provision of the tax code and each line item of federal expenditure becomes a “jobs” program, then a condition of dissolute fiscal promiscuity has arrived. Under those circumstances there is no way to restore sound fiscal governance except by means of a constitutional chastity belt; that is, an inflexible balanced budget amendment. And a ban on a commitment of military forces anywhere outside of US borders without explicit authorization of Congress would help, too.

THE EPIC IRONY OF THE KEYNESIAN ERA:

FAILURE OF THE SAVIOR STATE

So it now transpires that sundown is descending upon America owing to the failure of the state, not the machinery of capitalism. That is an epic irony. The state has grown by leaps and bounds since the New Deal era precisely because it was presumed to transcend the imperfections and disabilities alleged to inhere in the free market.

Those defects comprised the familiar indictment of laissez-faire. They included destructive swings in the business cycle; structural economic dislocations among regions, industries and communities; and humanitarian failure with respect to the ills of aging, poverty, unemployment, disability, and disadvantage. So the state was given one assignment after another; that is, to counterbalance the business cycle, even out the regions, roll out a giant social insurance blanket, end poverty, house the nation, massively subsidize medical care, prop up old industries like wheat and the merchant marine and foster new ones like wind turbines and electric cars.

In the fullness of time, therefore, the state became corpulent and distended—a savior state that could no longer save the economy and society because it fell victim to its own inherent shortcomings and inefficacies. Taking on too many functions and missions, it became paralyzed by political conflict and decision overload. Swamped with unquenchable demands on the public purse and deepening taxpayer resistance, it became unable to maintain even a semblance of balance between its income and outgo. Exposed to naked raids by powerful organized interest groups and crony capitalists, it lost all pretense that the public interest was distinguishable from private looting. Indeed, the fact that Goldman Sachs got a $1.5 billion tax break in the New Year's Eve fiscal cliff bill, legislation allegedly to save the middle class from tax hikes, is a striking if odorous case.

These evident warts and blemishes, however, remain invisible to the Keynesian touts who peddle risk trades on Wall Street and counsel more fiscal stimulants from Washington. Indeed, having become so inured to the state's modern role as an omnipresent agent of economic fixes and fiscal largesse, they are stunningly blind to the oncoming “state-wreck.” Yet the
mounting failures of the modern welfare-warfare state are every bit as serious as the ancient defects of the free market. Worse still, the misdeeds once attributed to the robber barons of laissez-faire are small potatoes compared to the depredations and extractions owing to the crony capitalists of the Keynesian era.

THE DEMISE OF GROWTH: THE “STATE-WRECK” AHEAD

The American economy would tumble into a paroxysm of economic contraction and financial market meltdown if its three umbilical cords to the state were severed. That is, the private economy has reached a state of utter dependence upon the central bank's printing press, the bipartisan fiscal régime of perma-deficits, and the military-industrial complex that bolsters what remains of the manufacturing sector.

None of these lifelines are sustainable and each may be nearing its asymptote. But like an end-stage alcoholic who finally drinks himself to death, the system is so dependent upon these dispensations of the state that it will inexorably drift toward catastrophe.

Ironically, the enormity of this danger is obscured by the simulacrum of prosperity that flows from these very dependencies. To take one example, we have seen that half of personal consumption expenditure growth since 2007 has been funded by deficit-financed transfer payments. That's phony growth borrowed from future taxpayers and injected into the economy by the consumption spending of transfer payment recipients.

If these safety net transfer payments were properly paid for by taxing the American public there would be no magical boost to GDP—just a state-commanded reshuffle among the citizenry of already existing income from current production. Accordingly, as indicated in
chapter 31
, even a modest normalization of the rates of household savings and personal taxation would reduce personal consumption expenditures by $1 trillion, or nearly 10 percent.

Yet that is only the leading edge of the state dependency that now undergirds the American economy. These enormous props include the massive inflation of energy and food commodities spurred by the Fed and its global confederation of money-printing central banks, and the freakish expansion of defense spending in a world where there are no advanced industrial state enemies. Save for these state-induced bubbles, the nation's industrial economy would have been shrinking at an astonishing rate.

Not surprisingly, this reality is not immediately evident in the GDP aggregates which so mesmerize the Keynesian commentariat. Total shipments of manufacturing goods in the early fall of 2000, for example, were $4.3 trillion and had risen to $5.8 trillion by September 2012. This $1.5
trillion pickup seems impressive on the surface but is only marginally respectable, in fact, when the 25 percent gain in the GDP deflator during this period is stripped out.

Coincidently, this cumulative rise in the price level amounted to 2.2 percent per year, or almost exactly what the Bernanke Fed claims to be its ideal inflation target. Yet really? Even with this modestly dishonest rise in the price level, the aggregates are not what they seem to be. In fact, constant dollar-manufacturing shipments rose by just $200 billion (2012$), not $1.5 trillion during the twelve-year period, meaning that most of the nominal dollar gain was Bernanke's wondrous inflation.

Even then, the resulting real growth in manufacturing shipments, at an anemic rate of 0.3 percent annually, might pass for the Greenspanian version of prosperity. According to the theory laid out in his memoirs, the United States doesn't really need to grow its manufacturing output, since the Chinese and other exporters are chronic oversavers and eager to lend vast amounts of their excess savings to high-living Americans so they can buy Chinese manufactures. When the onion is peeled further, however, even that twisted rationalization doesn't wash.

Even as total manufacturing shipments grew by just 4 percent in constant dollars between 2000 and 2012, shipments of real defense goods soared by 41 percent. That contrast alone is damning. Defense output by definition contributes nothing of economic value, and in this instance, the national security purpose for this giant expansion is also exceedingly hard to ascertain.

Indeed, it is now evident that there were never more than a few hundred Al Qaeda; that the invasions of Iraq and Afghanistan were grotesque mistakes and failures; that America's rampaging war machine has generated new enemies throughout the Middle East and near Asia; and that a duly elected “peace president” has barely stopped the military spending momentum, even as he has begun to retract our imperial footprint.

Yet this needless defense bubble is only part of the illusion of growth. Another part stems from the great commodity inflation generated by the Fed and its global convoy of money printing central banks after 2000. In round terms, energy prices rose 100 percent and food prices by 50 percent during this twelve-year period. Accordingly, another huge part of what passes for growth in manufacturing shipments consisted of food and energy inflation in the underlying raw materials, not true gains in manufacturing value-added.

Shipments of food and energy manufactures thus doubled during this period, rising from $1.3 trillion to $2.6 trillion. Yet when the vast inflation in these sectors is stripped out, constant-dollar output expanded by a much
more modest 12 percent. And the internals of this $1.3 trillion inflation-swollen pickup are even more revealing.

Upward of $1 trillion, or 80 percent, of this gain represented windfalls to the upstream raw material factors; that is, farmland in Iowa, royalties on the North Slope, and rents to the princes and emirs who occupy the desert redoubts of the Persian Gulf. Under a régime of sound money, by contrast, economies throughout the world—especially those of China and the other BRICs—would have grown much more slowly during this twelve year period. In turn, lower-gear growth would have generated modest relative price gains for scare raw materials, not the elephantine windfalls and virulent commodity inflation that issued from the Eccles Building and the People's Printing Press of China.

At the same time, the fact of this rampant commodity inflation means that the balance of the US manufacturing sector between 2000 and 2012 was downright punk. Thus, constant dollar shipments of non-defense consumer durable goods declined by 17 percent; real shipments of non-defense capital goods dropped by 24 percent; and real output of non-durable goods outside of food and energy shrank by a staggering 25 percent. In short, absent the printing press and war machine the American manufacturing economy would have already tumbled into a ruinous decline.

Indeed, in round aggregate numbers the picture is nothing less than startling. At the turn of the century, the US manufacturing economy outside of defense and the food and energy complex (e.g., “core manufacturing”) generated constant-dollar output (2012$) of $5 trillion. After twelve years of the (second) Greenspan bubble and the Bernanke bubble, core manufacturing output had tumbled to $4 trillion. This $1 trillion, or 20 percent, shrinkage in real terms is yet another measure of the big lie which undergirds the current simulacrum of prosperity.

THE FISCAL CLIFF:

WRECKING BALL OF THE KEYNESIAN STATE

The “fiscal cliff” gong show which traumatized the nation at the end of 2012 was rooted in a destructive symbiosis between Wall Street and Washington. It was portrayed by the mainstream media as an impetuous display of partisan strife, petty politics, and willful stubbornness, especially among Tea Party Republicans. But in reality the “fiscal cliff” was a boogieman trumped up by traders who needed a stock market prop and Washington politicians in thrall to the sundry Keynesian doctrines of tax-cutting and spending stimulus.

In truth, nearly every single item that constituted the fiscal cliff was a perfectly appropriate and rational fiscal policy action to reduce the $1.2
trillion federal deficit that persisted menacingly during the fourth year of a business recovery. As has been seen, the expiring $110 billion payroll tax abatement had been a stupid idea from the beginning, and the $300 billion Bush tax cuts for everyone had been unaffordable for more than a decade.