The Great Deformation (131 page)

The crucial steps that would be needed are few but large. They would never be adopted in today's régime of money politics, fast money speculation, and Keynesian economics, but they can be listed. They are compelling.

1. RESTORE BANKER'S BANK AND SOUND MONEY.
The Fed's open market operations and interest rate pegging would be abolished in favor of a mobilized discount rate at a stiff penalty over the money market. Humphrey-Hawkins would be repealed and all other Fed mandates with respect to the macro-economy or equity and debt markets would be rescinded. The Fed has created enough central bank credit for the next thirty years, meaning that it would not need to buy government debt or otherwise monetize securities for the foreseeable future. In reverting to the role of a banker's bank, it would examine collateral presented at the discount window and ensure ultimate liquidity of the banking system, while bringing free market interest rates back into the center of financial markets. With open market purchases eliminated, the FOMC and the 12 regional reserve banks could
be abolished: bank applicants for discount loans would mainly transact on-line with the borrowing desk at the Eccles Building. Over the next decade, the natural roll-off of maturing treasury and agency securities would automatically shrink the Fed's balance sheet to the September 15, 2008, level (under $1 trillion), thereby paving the way for a full return to sound money, that is, a gold-backed dollar.

2. ABOLISH DEPOSIT INSURANCE AND LIMIT THE FED DISCOUNT WINDOW TO NARROW DEPOSITORIES.
The abomination of deposit insurance would be abolished, and the Fed's discount window would be open only to “new charter” national banks. These charters would be offered to “narrow” depository banks which would take deposits and make loans, but would be banned from trading, underwriting, or agenting any business in securities, derivatives, commodities, or whole loan paper they had not originated. Nor could chartered banks be in the asset management, insurance, or financial advisory business, and they would be required to maintain minimum equity capital ratios of 20 percent or higher, the levels which prevailed before the 1920s. A postal banking system would be set up by the federal government for blue-haired ladies and timid savers who were unwilling to risk putting their savings into uninsured, chartered banks, but they would receive a penalty interest rate below the chartered bank rate to compensate the federal government for use of its balance sheet and credit rating.

3. ADOPT SUPER GLASS-STEAGALL II.
The great Wall Street Banks would be put out in the cold to compete as enterprises on the free market without recourse to funding from insured deposits or access to the Fed discount window. Pursuant to the implementation of Glass-Steagall II, the large banks would be forced to divest their deposit banking business, and cap their balance sheets at 1 percent of GDP ($150 billion) for ten years in order to regenerate honest, competitive financial markets and to reduce the risk of crony capitalist recidivism.

4. ABOLISH INCUMBENCY THROUGH AN OMNIBUS AMENDMENT.
The US Constitution would be subject to an Omnibus Amendment, a twenty-first-century “reset” to restore viability, honesty, and functionality to democratic governance. Accordingly, the terms of the president and House and Senate members would be set at six years, staggered elections to the Congress would occur every two years, and no incumbent of federal office could stand for reelection. The electoral college would also be abolished, bringing the nation into the modern world of one citizen, one vote.

Federal election campaigns would be funded strictly with public funds and the time for federal campaigns would be limited to two months every other year. No federal campaign money would be available before that designated election period, and it would be illegal to campaign for federal office with private money. Additionally, no former federal office holder would be allowed to lobby and the Citizens United decision would be explicitly overturned and replaced with a ban on election funding and legislative lobbying with corporate or union funds. The overall purpose of the Omnibus Amendment would be to rid the nation of a permanent governing class, and weaken the political parties to the point of their disappearance, as they would have no useful purpose in the citizen-based government provided under the amendment.

5. REQUIRE EACH TWO-YEAR CONGRESS TO BALANCE THE BUDGET.
A crucial component of the Omnibus Amendment would be a strict requirement that the federal budget be balanced within the two-year term of each Congress other than under a constitutionally valid declaration of war. Enforceability would be guaranteed by a monthly certification from the secretary of the treasury that the run rate of spending and revenues were on track to achieve the balanced budget requirement over the two-year term. The certification would be signed by the president and the top officers of the Treasury Department, upon Sarbanes-Oxley-type criminal penalties for knowing misrepresentation or willful negligence. In the absence of certification, spending run rates would be automatically cut across the board to the estimated run rate of revenues.

6. END MACROECONOMIC MANAGEMENT AND SEPARATE THE STATE AND THE FREE MARKET.
The Keynesian predicate would be abolished by virtue of the Omnibus Amendment. Accordingly, the state would be separated from the free market by a sturdy fence. The outcomes of the latter in terms of wealth, living standards, GDP, jobs, housing starts, and shipments of container-board would be determined on the free market by the actions of consumers, producers, savers, and investors. If there weren't enough jobs, wage rates would tend to fall until there were enough jobs to balance supply and demand; that is, the free market would be in charge of job creation, not Washington and its crony capitalist gangs.

7. ABOLISH SOCIAL INSURANCE, BAILOUTS, AND ECONOMIC SUBSIDIES.
The end of the Keynesian fiscal state would require a fundamental reconstitution of the role and functions of government. The provision of police functions (including most of homeland security) and public goods such as
highways, education, and amenities like recreational facilities would revert to state and local governments. Social insurance, bailouts, and other forms of federal economic intervention and subsidization of the free market would be abolished. These changes in the functions of the state and the level of government at which they are carried out would eliminate the fiscally suicidal forces built into the current system, including intergenerational thievery under social insurance and interregional larceny embedded in federal grants in aid and economic subsidy programs.

8. ELIMINATE TEN MAJOR FEDERAL AGENCIES AND DEPARTMENTS.
Under this régime, much of the federal government could be abolished including the Departments of Energy, Education, Commerce, Labor, Agriculture, HUD, Homeland Security, the SBA, DOT, and the Ex-Im Bank. Likewise, other Washington venues for crony capitalism would be eliminated by abolishing, for instance, Fannie and Freddie, the FHA, homeowner's tax preferences, and the remainder of the housing goody bag. In the same vein, all forms of energy, black and green, would be put strictly on the free market; Amtrak would sink or swim as a private enterprise; subway commuters or taxpayers in New York City would pay the full fare, not innocent taxpayers in Nebraska; and GE, Caterpillar, and the rest of the corporate freeloaders would be deprived of cheap export financing from the Ex-Im bank.

9. ERECT A STURDY CASH-BASED MEANS-TESTED SAFETY NET AND ABOLISH THE MINIMUM WAGE.
Outside of national defense and foreign affairs, the primary function of the federal government would be to maintain a means-tested safety net. The latter would fulfill the humanitarian sentiments held by the electorates in modern urban-industrial societies where extended family support networks no longer exist, while strictly containing the risks of abuse and freeloading by the able bodied and non-needy. This means that social insurance and the rigmarole of trust funds and insurance mythology would be abolished and that any citizen wanting aid from the state would be subject to a strict and intrusive means test, including the spend-down of all assets to some minimum level. Additionally, a work requirement for the able bodied of normal working age would be coupled with the abolition of the minimum wage and the scaling out of transfer payments to the working poor based on an all-in tax rate which rewards work and effort. Finally, all existing programs including housing, food stamps, and Medicare and Medicaid would be converted to cash equivalents, thereby eliminating the provider abuse and the crony capitalist policy and administrative exploitation that are inherent in in-kind programs.

10. ABOLISH HEALTH “INSURANCE” IN ALL ITS FORMS.
The replacement of Medicare and Medicaid with cash-based transfer payments would be coupled with the repeal of Obamacare and the elimination of the massive tax subsidies for employer health insurance. So doing, the giant third-party payment deformation would be eliminated from the medical care markets and real consumers would take charge of their own health expenditures, putting providers under the competitive discipline of the free market. The cancerous growth of the medical care complex would be halted and reversed, thereby stifling the ultimate driver of welfare state bankruptcy. Indeed, the free market would rapidly give rise to solutions to all of the problems which have justified the massive incursions of the state: cost of care would be lower; pricing would be nondiscriminatory; and proficient fee-based medical care advisory services would arise to help consumers, especially the elderly and poor, navigate the medical care system and get the largest bang for their buck. The one necessary concession to socialism would be a system of federally licensed catastrophic insurance funds which would automatically cover the means-tested safety-net population regardless of preexisting condition in return for mandatory premiums; these would be withheld from beneficiaries' cash transfer payments and be set by competitive bid.

11. REPLACE THE WARFARE STATE WITH GENUINE NATIONAL DEFENSE.
The warfare state would be demobilized and dismantled, with budget resources reduced to the Eisenhower Minimum outside of a declaration of war. Foreign policy would be based on the principle of non-intervention in the internal affairs of all other nations coupled with the Eisenhower policy of massive nuclear retaliation. In other words, the nation's conventional forces would be reduced by perhaps two-thirds and be used solely to shield the continent from conventional military attack; the domestic police forces would be in charge of warding off and controlling terrorist subversion; and any foreign aggressor contemplating a nuclear attack against the United States would know with certainty that the consequence would be incineration of their own nation. At the present time the Eisenhower Minimum would amount to about 2.5 percent of GDP and would more than meet the legitimate defense needs of a nation that is broke and which was never elected policeman of the world in the first place.

12. IMPOSE A 30 PERCENT WEALTH TAX; PAY DOWN THE NATIONAL DEBT TO 30 PERCENT OF GDP.
Even if another road were chosen, the debt of the US government would not stop growing due to the built-in deficit momentum until it reached $20 trillion at minimum. But contrary to the present
Keynesian foolishness, national debt of that magnitude is a time bomb on an economy that will struggle for years to reach $20 trillion of GDP, or a 100 percent debt ratio. The reason is that eventually interest rates must normalize or the monetary system will implode in a final orgy of money printing. Normalized interest rate increases of, say, 300–500 basis points under a mobilized discount rate régime at the Fed, in fact, would cause an explosion of budget outlays (up to $1 trillion annually) and a resulting feedback loop into honest debt markets which could not be contained because free market interest rates would rise even further. The prudent solution, therefore, would be to get the federal debt burden back to 30 percent of GDP where it was at the time of the Camp David infamy. That would amount to a $6 trillion debt limit compared to a $20 trillion GDP under an unrosy scenario a half decade or so down the road.

Needless to say, $14 trillion of national debt reduction could never be achieved under any known ordinary fiscal device; it would take a one-time wealth tax, essentially a recapture of part of the windfall wealth gain that has accrued to the top of the economic ladder during the age of bubble finance. Presently, household net worth is about $60 trillion and upward of $45 billion is held by the top 10 percent of households. Accordingly, a 30 percent wealth tax on the upper rungs and payable over perhaps a decade would reduce the national debt to the target 30 percent of GDP. In computing the one-time assessment, the present value of all benefits foregone owing to the cancellation of social insurance for the affluent would be credited against amounts of wealth tax otherwise owing.

13. REPEAL THE SIXTEENTH AMENDMENT; FEED THE BEAST WITH UNIVERSAL TAXES ON CONSUMPTION.
Needless to say, the wealth tax and national debt paydown would have to be done as part of a grand social bargain that repealed the Sixteenth Amendment. The ultimate lesson of the Great Deformation is that society cannot starve the beast of the state; it must feed it with current taxes on the people, as would be guaranteed by a balanced budget amendment. But in the modern world income taxes on corporations and affluent households are merely an invitation for crony capitalist lobbies to seek endless loopholes and densification of the tax code with obscurantist hair-splitting over definitions of income, expense, time periods, and categories and flavors of income types.

The only thing which can be fairly and efficiently collected, in truth, is a uniform tax on domestic consumption at the point of sale. More importantly, under a balanced budget amendment taxation of income would ultimately incite true class war and generate punitive barriers to acts of capitalist enterprise. The hideous position of the Obama White House
during the first fiscal cliff debate was dispositive: it wanted to defend the entire welfare state, tepidly curtail the warfare state, and collect the revenue necessary to pay for them with higher taxes on just 2 percent of the population! If the other road were to be taken, therefore, the people should be required to feed the beast and the state should extract the necessary revenues through an upcharge on the consumption expenditures of each and every citizen, including those who have submitted to a means test to receive transfer payments from the state.