2012 and the Last Chance Saloon
Yes, S&P’s credibility is somewhat lacking. Yes, it’s a bit grating to hear China lecturing the U.S. on economics. And yet … you think and act below par, then you live below par.
In fact, the real problem is that we, as a nation, vote below par. We don’t bother to show up, as a group, at midterm elections. Thus midterm elections are hijacked by the extremists in both parties (flailing Nancy Pelosi in 2006, the dipshits of the Tea Party in 2010). So, what does the majority expect? You don’t find people in newly minted democracies foresaking the right to vote that people fought and suffered for. Why does it happen so frequently here?
And how do we fix it? Some really good ideas were aired by a former Texas congressman, Mickey Edwards, in a recent Atlantic Monthly. But all the intelligent rule changes and incentives in the world cannot prevent stupid people from doing stupid things. So let’s get real: in 2012, the corrective needs to be comprehensive and perfectly targeted or the U.S. will accelerate its slow and relative decline into something more like an exhilarating (to the Chinese) downhill toboggan run.
The great challenge of 2012 and, indeed, the next 20 years, will be neither military nor economic but political. Today, virtually everyone across the American political spectrum agrees that something must be done to whip the country back into shape; the question of the moment – indeed, one which dominates the campaign debates of the 2012 election – is how best to do it, how drastic the crash diet should be and what side effects should be tolerated along the way. Economists, with the exception of a few outliers on both the right and left, general agree that no short cut or easy plan exists to restore Uncle Sam to fighting trim. GOP politicians pandering to the Tea Party voters in the primary season prescribe a crash diet of Draconian spending and tax cuts which would pitch the United States back into a deep recession, probably dragging a good chunk of the developed world with it.
The current British economy offered a living, bleeding case study of the effects of Draconianism. Subjected to austerity policies that contain more than a faint whiff of “Tea” by the government of Prime Minister David Cameron, Britain’s economic recovery promptly stalled and dove toward “double dip” territory. The Chancellor of the Exchequer, David Osborne, points to a faint pulse in Q2 and says, ‘see, we managed not to destroy the economy.’ But he’s not fooling me. David Blanchflower, arguably the world’s leading labor economist, in late 2010 had warned Osborne that deep austerity on the heels of a deep recession was a historic policy mistake that could permanently lower the “speed limit” of British GDP growth. But by the middle of the next summer, the nightmare was unfolding. “Osborne’s policies will be responsible for the worst recession in a century — and maybe it should be named the “Second Great Depression,” he wrote in July when statistics showed Britain’s once robust growth was on track to lag even the pace of recovery from 1930-1934.
In the United States, where similar macroeconomic folly is now having international implications, the lesson has failed to take. What? Britain not “exceptional” enough for you? Gravity applies to the Brits, but not to us, is that it? Ugh!
With the silly season of presidential primaries looming, when rational thought takes a back seat to pleasing the zealous, often intellectual inert “base,” the GOP appears unwilling to examine this real world debacle. Instead, an intellectually dishonest ditty from the Grand Old Hymnal, “What Would Reagan Do?” wafts up from the party’s rank-and-file. Whether the 1980/2012 comparison is relevant to America’s current problems or not (the case is dubious at best), contemporary Republicans seem either unwilling or unable to grasp what Reagan actually did do.
So thick is the propaganda crush that has formed around “The Gipper” that no one allows for the fact that, faced with a difficult economy and divided government himself in the 1980s, Reagan chose to mix tax cuts with stimulus spending and, yes, tax increases, too. Bruce Bartlett, an economic advisor to Reagan and a Treasury official under George H.W. Bush, professes amazement at the twisting of the historical record by those who profess to idolize his former boss. While Reagan is remembered by the faithful for his 1981 tax cuts, Bartlett reminds us, “the cumulative legislated tax increase during his administration came to $132.7 billion as of 1988 ($367 billion today). This compared to a gross tax cut of $275.1 billion. Thus Reagan took back about half the 1981 tax cut with subsequent tax increases.”
All of which brings us back to this: Both S&P and China have very little to recommend themselves as financial advisers. However, in this case, they’re both right. The U.S. downgrade is deserved and should be a message above all to American voters: show up!
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