What follows our lost decade? Looking ahead to the next decade…

The past ten years were a lost decade for America (as described in Some Americans worry about we’ll have a lost decade. Bad news – we just had it.).  Most American households either lost ground (economically) or stagnated.  Worse, valuable time was lost — years essential to prepare for the challenges ahead.  And, perhaps disastrously, we had an orgy of borrowing.  What comes next?

  1. The Spend-And-Borrow Economy“, Nouriel Roubini, Forbes, 27 August 2009
  2. An Uncomfortable Choice“, John Mauldin, Thoughts from the Frontline Weekly Newsletter, 28 August 2009
  3. Our quarter-century penance is just starting“, Ambrose Evans-Pritchard, op-ed in the Telegraph, 29 August 2009


(1)  The Spend-And-Borrow Economy“, Nouriel Roubini, Forbes, 27 August 2009 — Excerpt:

In the last few months the world economy has been saved from a near-depression. That feat has been achieved by a range of extraordinary government stimulus measures: In the U.S. and in China, and to a lesser extent in Europe, Japan and other countries, governments have pumped liquidity, slashed policy rates, cut taxes, primed demand and ring-fenced and back-stopped the financial system. All of this has worked, but at a cost. Governments have been spending and borrowing like never before. The question now is: how do they stop?

This is not a simple problem. Restore normality too soon and the risk is that a weak recovery will double dip into a second and deeper recession. Restore it too late and inflation will already be ingrained.

… Necessary as the stimulus has been, it cannot go on indefinitely. Governments cannot run deficits of 10% or more of GDP, and they cannot go on doubling the monetary base, without eventually stoking inflation expectations, pushing up long-term interest rates and eventually eroding their very viability as sovereign borrowers. Not even the U.S. can do that.

The fiscal implications of the current policy package are particularly serious. For the time being, fiscal policy has been put at the service of survival, but the current price of survival is that net public debt is going to double as a share of GDP between 2008 and 2014. Even using the very optimistic forecasts of the Congressional Budget Office, which anticipate growth of around 4% over the next few years, the net debt burden will rise from 40% of GDP to 80%–that’s an increase in the debt stock of about $9 trillion.

… A combination of higher official indebtedness and monetization has the potential to yield the worst of all worlds, pushing up long-term rates and generating increased inflation expectations before a convincing return to growth takes hold. An early return to higher long-term rates will crowd out private demand, as lending rates on mortgages and personal and corporate loans rise too. It is unlikely that actual inflation will emerge this year or even next, but inflation expectations as reflected in long-term interest rates could well be rising later in 2010. This would represent a serious threat to economic recovery, which is predicated on the idea that the actual borrowing rates that individuals and businesses pay will remain low for an extended period.

Yet the alternative–the early withdrawal of the stimulus drug that governments have been dispensing so freely–is even more serious. The present administration believes that deflation is a worse threat than inflation. They are right to think that. Trying to rebuild public finances at a deflationary moment–a time when unemployment is rising, and private demand is still contracting–could be catastrophic, turning recovery into renewed recession.

History offers more than one example of this error. It happened in Japan in the late 1990s when the Japanese government feared the effects of fiscal deficits and of an increase in inflation as the economy was beginning to recover after almost a decade of deflation. Consumption taxes were raised too soon and the “zero interest rate policy” was abandoned. Within a year the economy was back in recession.

It also happened in the U.S. in the 1930s. President Roosevelt instituted a massive stimulus package when he came to office in 1933, to push the U.S. economy out of the depression, but by 1937 the administration was worrying that inflation was returning and that deficits were too large; so it cut spending and raised rates and the Fed tightened monetary policy. By 1938 the economy was heading back into near-depression.

So policymakers are between a rock and a hard place. Stop spending now and risk renewed recession and deeper deflation (stag-deflation). Keep spending now and risk renewed recession amid rising inflation expectations (stagflation).

(2)  An Uncomfortable Choice“, John Mauldin, Thoughts from the Frontline Weekly Newsletter, 28 August 2009 — Excerpt:

And technically he is right. If there were adults supervising the party, it might be possible. But there are not. The teenagers are in control. Instead of fiscal discipline, we are hearing increased demands for more spending. Please note that the very rosy future-deficit assumptions assume the end of the Bush tax cuts at the close of 2010. But raising taxes back to the level of 2000 does not make the projected future budget deficits go away.

I mean, seriously, does anyone think Pelosi or Reid are going to lead us to fiscal constraint? Obama talks a good game, but he has not offered a serious deficit-reduction proposal, other than further tax increases. And by serious, I mean we need cuts on the order of several hundred billion dollars. The Republicans lost their way and their power (deservedly, in my opinion). Just as at the high school prom, the very few adults are being ignored.

It is the proverbial rock and the hard place. Cut the stimulus too soon and we slide back into a deeper recession. Let the budget spin out of control for a few years and we will see inflation return, with higher rates and a recession. Raise taxes by 1.5-2% of GDP in 2010 and we are shoved back into recession.

There are no good choices. If we do the right thing and cut the deficit, it means very hard choices. Can we keep our commitments to two wars and our massive defense budget? Medicare and Social Security reform are not painless. Education? Research? The “stimulus”? But cutting the deficit by hundreds of billions while raising taxes by even more than is already in the works, is not the formula for sustainable recovery.

Have we grown up? Are there adults in the room? Sadly, I don’t think there are enough. We are still a nation of teenagers. We will do whatever we can to avoid the pain today. We will kick the can down the road, hoping for a miracle. Will we grow up? Yes, but the lessons learned will be hard.

There are no statistical signs of an impending recession. We are not going to get an inverted yield curve this time, which made it relatively easy for me to predict recessions in 2000 and 2006. We are in a deflationary, deleveraging world. A far different world than in the past.

I see little room for us to avoid a double-dip recession. It would take the skill and speed of former Cowboys running back Tony Dorsett hitting a very small hole in the line to break us into the open. I see no running back in our national leadership with such ability. As I have outlined above, recession could be triggered again in any number of very different economic environments. It all depends on the choices we make. But the choices lead to the same consequences, at least in my opinion.

(3)  Our quarter-century penance is just starting“, Ambrose Evans-Pritchard, op-ed in the Telegraph, 29 August 2009 — Excerpt:

“The current financial crisis is unlike any others,” says the Bank for International Settlements. Lasting damage has been done. The “cumulative output loss” is likely to reach 20pc of GDP in the major economies.

The message is the same at the International Monetary Fund. “The world is not in a run of the mill recession. The crisis has left deep scars. In advanced countries, the financial systems are partly dysfunctional,” said Olivier Blanchard, the Fund’s chief economist.

Mr Blanchard said an IMF study of post-War banking crises led to an unpleasant finding. “Output does not go back to its old trend path, but remains permanently below it.”

Then the sting: we are exhausting the limits of fiscal stimulus. “The average ratio of debt to GDP in the G-20 economies was high before the crisis, and is forecast to exceed 100pc in the next few years”.

We cannot add debt, so the IMF says we must draw down our future pensions and future health spending to keep today’s economy afloat. “A modest cut in the growth rates of entitlements can buy substantial fiscal space for continuing stimulus.”

… We know what caused this crisis. The West kept short-term interest rates too low for a quarter century, luring society into debt: and the East held down long-term rates by flooding bond markets as a side-effect of their mercantilist strategy (ie suppressing currencies to gain export share).

The outcome was over-investment, excess capacity, and too much debt among those supposed to buy the goods. Has any of this changed? No. Have we cleared the excess plant? No.

Jeff Wenniger from Harris Private Bank says an army of baby-boomers have seen their old age plans shattered by the housing bust. Their nightmare is here. They will have to spend less, and save more. “Generational destruction of a society’s balance sheet down not rectify itself in a matter of months”.

How about a quarter century?


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For more information about this topic

To see all posts about the new era now being born:

Posts with speculation about the future, about structural changes to America and the world:

  1. Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
  2. Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
  3. German Finance Minister Peer Steinbrück explains how the world is changing, 30 September 2008
  4. America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
  5. America is changing. Read some chillling words from a liberal economist, 2 October 2008
  6. Does this economic crisis make the State stronger – or is it another step in the decline of the state?, 16 January 2009
  7. This financial crisis is the transition to a new world; like birth, it is painful, 11 February 2009
  8. Everything written about the economic crisis overlooks its true nature, 24 February 2009
  9. A look at the new world – after the downturn, 19 March 2009

18 thoughts on “What follows our lost decade? Looking ahead to the next decade…”

  1. I hope for a peaceful, Constitutional revolution with the goal of re-emphasizing Federalism (link).
    Fabius Maximus replies: Is this built on some deep understanding of our situation? Or just another way of hoping the Blue Fairy will save us? I hope for a pony, too.

  2. I don’t want to change any of my values. Why not try everything again and just hope for a different result?
    Fabius Maximus replies: That is, of course, the government’s plan (and Wall Street’s, also — to the extent that they can be considered distinct entities).

  3. Why are military expenditures never mentioned in these articles? Cut social security, cut medicare, cut everything but for the love of God continue spending as much as the entire rest of the world put together on the armed forces. Meaningful reduction in deficit spending seems to be a completely alien concept to those that shape public discourse, on the order of teaching a fish to ride a bicycle.

    I mean, cutting spending to the point where the US only spends as much as the next, 8 major powers put together on defense would still free up 200 billion or so a year. That strikes me as enough to “buy substantial fiscal space for continuing stimulus.”

    The effects of Afghanistan and Iraq on the US Military are going to require a serious period of quiescence and rebuilding, why not take advantage of that lull?
    Fabius Maximus replies: The answer appears in the second excerpt of this post: “Have we grown up? Are there adults in the room?”

    For articles about our insanely imperial defense strategy, see the FM reference page America’s national defense strategy and machinery.

  4. I’m not holding much faith in the US government, it seems to be following the state of California’s trajectory a couple years behind:

    The state of California is incredibly pro-spending (prisons, education, roads), collects a lot of revenue (9% income tax almost from the very start, 9% sales tax, and the only thing that keeps the 1% property tax under control is prop 13 limits reassesment), yet has been a mess for years.

    There is no compromise, nor incentive to compromise, between the democrats and the republicans.

    Nobody is willing to raise sensible taxes to increase revenue. eg, what got Arnold into office was there was a 2% property tax on cars, nice and progressive, that had gotten eliminated but had a sunset clause.

    The state budget got into trouble, the tax automatically came back, and he rode very deceptive claims (the press can’t tell the difference between mean and median if its bites em on the ass, and everyone allowed it to be called the “car tax”, when the “Lexus tax” is more descriptive in practice) to office.

    As a result, nobody will raise revenue in times of trouble, but will attempt to play debt games which even THOSE the state has run out of. California has a B-something credit rating, even though debt is supposed to be paid befor eveyrthing else. Unlike cities and counties, there is no notion of bankrupcy for states, and unlike the federal government, the state lacks printing presses.

    At the same time, nobody is willing to cut spending on the BIG items. Oh, they’ll happily close all the state parks, and slowly shift the UC system so that it might as well just go private, and let the road maintinence budget go to zero, but prisons and K-12 are sacrosanct: K-12 in the state constitution and the prisons in practice.

    EG, the state NEEDS massive prison reform. Its way too expensive, the sentencing rules are byzentine and uneffective, yet it doesn’t help public safety: So many of the non-violent inmates could be “Tagged and released”: strap a GPS/cellphone monitor on their ankles and let em go, among others.

    Our Repubican!? governor is pushing a massive reform package.

    Yet the republicans refuse to vote for reform because that would be “soft on crime”. Period. A Republican votor can get ZERO votes from his own party.

    And many democrats refuse to vote for reform because the repubilcans in the elections would be able to call the democrats “soft on crime”, and are naturally afraid of a willie horton incident.

    Simply put, both parties are so focused on elections and electability that the system itself does not matter. And as so succinctly put in the simpsons in a Treehouse of Horrors episode, we’re stuck!

    Homer: America, take a good look at your beloved candidates. They’re nothing but hideous space reptiles. [unmasks them]
    [audience gasps in terror]
    Kodos: It’s true, we are aliens. But what are you going to do about it? It’s a two-party system; you have to vote for one of us.
    Man1: He’s right, this is a two-party system.
    Man2: Well, I believe I’ll vote for a third-party candidate.
    Kang: Go ahead, throw your vote away.

    And its not like the 3rd parties in California are viable anyway: The libertarians make the republicans seem sane on fiscal issues, and the Greens couldn’t govern a hippy-commune in the santa cruz mountains.

    So I believe if you want to look at the future of this nation’s governance (and as a side consequence, long term economic health), look to California. Like so many ways previously, we’re leading the trend…

  5. Nicholas Weaver speaks much truth.

    Unmentioned in any of these economic forecasts, however, remains the fact that the world economy now shudders through a paroxysmic change as convulsive as the transformation from steam power to electricity and from a rural farming economy to an industrial assembly-line economy between the 1890s and the 1920s.

    Capitalism finds itself under extraordinary pressure on all fronts. Industry after industry disintegrates, melting away as the profit motive gets removed. In more and more areas of the world economy, the profit motive is being eliminated and free open source peer production is becoming the new economic paradigm — if we can even call it an “economic paradigm,” since free open source peer production eliminates traditional capital and traditional markets.

    [1] The newspaper industry is disintegrating, being replaced by free online information posted by volunteers and twitter feeds that offer more detailed news than traditional outlets like TV newscasts. In many cases bloggers now correct gross factual errors (Judith Miller, Joe Klein, Anthony Cordesman, Tom Friedman) of the mainstream press and break the important stories, while the allegedly “mainstream” news sources resign themselves to covering trivia like Jenna Bush’s new hairdo and the latest news about the hunt for Natalee Holloway’s killer. (See http://www.d-n-inet‘s and and http://www.tomdispatch.com‘s and FM’s constant stream of corrections of the flood of misinformation which passes for “serious” press coverage of the Af-Pak war and the military-industrial complex for more examples of this accelerating grassroots phenomenon.)

    [2] The TV networks are dying, being supplanted by YouTube and a vast tidal wave of older content on DVD available at nominal cost from Netflix. Why pay $10 for a crappy movie like TRANSFORMERS 2 at the theater when you can rent a month’s worth of classic films from Netflix for $8.99?

    [3] The book publishing industry is crumbling, getting replaced by free online content. More and more authors are now giving away their content for free, and entire publishers, like Baen Books, are making their entire catalog of books freely available online.

    [4] The foundations of the world banking system are starting to show hairline cracks as zero-profit grameen bank loans continue to eat into the traditional markets of the big banks. On the high end, the relentlessly reckless gambling of the investment banks has already destroyed investment banking as a profession: all such banks are either out of business, or under heavy regulation and effectively now ordinary banks.

    [5] Distant rumblings are now beginning to threaten traditional light manufacturing as increasingly sophisticated rapid replicators (devices that print 3-D objects, up to and including stainless steel metal objects) are getting scaled up and following the same Moore’s Law we saw with computers. Scientists and engineers are now racing to design rapreps large enough to “print” entire buildings, houses, cars, boats, etc.

    [6] Traditional advertising is going away. All the middlemen are disappearing, including (but not limited to) insurance agents. The current battle over health care amounts to nothing less than removing the entire profit motive from the health care industry. If this had been attempted before the fall of the Soviet Union, it would’ve been considered treason and labeled communism.

    [7] Huge swaths of traditional industries like the classified ads in newspapers have been reduced to essentially zero-profit non-capital markets run by reputation instead of for profit. Craigslist charges nothing for classified ads; increasingly, more and more online businesses adopt this model. Free is a price no capitalist can compete with, and as a result, capitalism finds itself in retreat, being driven into the sea as the profits gets sysetmatically removed from more and more of the ecnomy.

    [8] Movements in which people contact one another online to swap things they don’t want anymore (clothes, CDs, tools, etc.) instead of selling them or buying new consumer goods are starting to undermine the big-box consumerism model of the world economy.

    [9] As fuel prices continue to rise, globalism finds itself collapsing because it is simply no longer cost effective to ship commodities around the world with $200-a-barrel oil. As fuel prices continue to skyrocket, more and more trade will become local, and free open source peer production will continue to erode traditional capitalism.

    [10] Whole swaths of formerly basic industries are now going away. Microsoft is faltering as more and more software becomes free services available online; free wifi at cafes is replacing the need to pay for broadband internet connections. ISPs are going out of business because consumers prefer to use free services like gmail and yahoo mail and connect to the net for free via laptop. Giant computer makers like HP and Dell are watching their profits collapse as computing gets subsumed into everyday objects and devices like smartphones increasingly take over the function of traditional desktop computers. Encyclopedia publishers and textbook publishers are watching their profits vanish as Wikipedia and the free open source textbook movement move from strength to strength. Entire old-line industries like car makers are simply going away as people become unable and unwilling to pay for expensive gasoline-sucking land yachts, turning instead to bicycles and mopeds and public transit. The music industry is in freefall, with CD sales flatlining. Whole hosts of formerly “basic” industries have seen their entire business model disappear.

    What the world economy will look like 20 years from now, I don’t know. But one thing I can predict: “free” will increasingly be the price for goods and services that now cost money.

    Serious people are now increasingly talking about how to move the entire world economy away from the “endless growth + rampant consumism” model to a paradigm that removes profit and capital entirely from markets in a sustainable zero-emission zero-waste zero-growth model. How this plays out, I don’t know. But it bodes nothing less than a tectonic upheaval in the world economy as we have known it.

  6. RE: 5

    Largely true, but mostly true of Robert Reich’s “symbolic manipulation” function which is vested in the cities. In the countryside, hauling lumber by moped is not happening. Chemical fertilizer is not becoming free.
    This is leading to political tension by geography as depicted in the blue/red map of state politics. Inside blue states, the same rifts are growing. California is starkly divided by geography. An ever more besieged central valley resents the power of city politicos to deny them water, frustrate them from mining and drilling, and tax their productive output to make up for revenue lost from symbolic manipulation jobs; publishing, banking, communications, computing etc.
    When the tension comes to bared knuckles, and perhaps blows, it will be along these lines. Sarah Palin is dangerous as dynamite because she represents a nucleation site around which the rural interests can coalesce.
    If California is our national bellwether, expect urban power center politicians like Barbara Boxer to come under increasing attack by “drill baby drill” rural and exurban factions just like is happening in Ca.

  7. Most people don’t “get” the concept of a zero-emission zero-growth non-monetary noncapitalist economy, and bc is no exception.

    “In the countryside, hauling lumber by moped is not happening.”

    You don’t need lumber when buildings are built from recycled materials. No waste, no strip-mining needed, no deforestation required.

    Fantasy, right? Pure “pie in the sky” delusion, right? Wrong. It’s happening right now.

    “Chemical fertilizer is not becoming free.”

    No, it’s oil-based and therefore becoming so expensive farmers can’t afford it. So they’re moving instead to sustainable farming with much less fertilizer and far less toxic runoff and topsoil loss.

    Clashes over mining and drilling are going away because there’s increasingly less to mine and drill. Opening all the undrilled Alaska wilderness and offshore California coastline to oil rigs would only keep America going for 5 or 10 extra years. The solution is not to mine more and drill more, but to reduce the need to mine and drill at all.

    Most people don’t yet grasp these realities of the limits to global growth. But they will.

  8. Let’s go back to basics. Governments don’t produce anything. They feed off the labor of others. That means that any distribution of resources that government controls will be by its very nature inefficient (cost more than actual value)–defense, social programs – nothing is exempt. If it’s centrally planned, it will not have the information that millions of distributed people, working with their own information, can bring to the table and “vote” on the relative value of goods and services.

    Mclaren holds up a multitude of changes as evidence of a collapse of capitalism. So who exactly does he think should be in charge of “fixing” all of this? Does he think that somehow, some all-knowing council or committee or legislator or president can know the “right” moves in the internet economy (assuming that you even agree with his or anyone else’s criteria)?

    Let’s do a thought experiment: Let’s imagine that government controls 100% of the economy rather that the 45% that it controls in my state. Dang, that’s a lot of central planning by a bunch of folks who really don’t have all the information, and have their own biases on what should be spent where to boot. Oh, and what, exactly, are they going to spend? Even Sweden backed off of this model when they found it wasn’t viable.

    We are seeing in the decline of newspapers and in Craig’s list a revolution. Distributed millions will figure out how to innovate – not some Office of the Supreme Ministry for the Fair Utilization of the Internet – but only if we let them. The industrial revolution would never have happened if we’d had OSHA and the EPA. We need more freedom, not less.
    Fabius Maximus replies: I am certain this is not correct.

    “Governments don’t produce anything.”

    Social order, stability, a degree of social equity. All these and more are the products of government. If you disagree, go to areas that lack government. We call them failed states. Like Somalia. Write back how much you enjoy your visit.

  9. Re #5
    What an interesting post ,the whole greater than the parts . Most thought provoking , especially in relation to my business . Thankyou .

  10. The world of the future described my mclaren would be wonderful. As a scientist, engineer, and innovator, I hope it arrives. I’m trying to help it arrive. Just know that getting there will take a ton of work. It will absorb resources in the near term, costing lots of money now, and may pay back in our rosy future as described, or it may not. The reason it may not is that some of us “techies” are starting to bum out about things like the periodic table. We are not going to get more atoms, ones that do what we want. The possibilities are therefore not endless. We are learning more about how to mix and match the ones we have, but we are also learning there are limits to what can be achieved by mixing and matching. Nothing he describes violates the first or second laws of thermodynamics, nor conservation of mass, therefore they are possible. But neither he nor I know what is ultimately achievable and not achievable. Like most good things, getting to his dream world of plenty for all with zero cost, zero waste, etc. will require tremendous societal, and personal discipline, corresponding short term self denial, and luck. Based on my experience, it is delusional to think it will come easily. It may not come at all. We may be wishing for a pony…again.

  11. In respect to the article of Nouriel Roubini.

    Maybe such observations where relevant 20-30 years ago. Excerpts from “The Rise and Fall of the Great Powers” by Paul Kennedy, published in 1988.

    The continuation of such trends, alarmed voices have pointed out, would push the U.S. national debt to around $13 trillion by the year 2000 (fourteen times that of 1980), and the interest payments on such debt to $1.5 trillion (twenty-nine times that of 1980).237 In fact, a lower­ing of interest rates could bring down those estimates,238 but the over­all trend is still very unhealthy. Even if federal deficits could be reduced to a “mere” $100 billion annually, the compounding of na­tional debt and interest payments by the early twenty-first century will still cause quite unprecedented totals of money to be diverted in that direction. Historically, the only other example which comes to mind of a Great Power so increasing its indebtedness in peacetime is France in the 1780s, where the fiscal crisis contributed to the domestic politi­cal crisis.

    … The trends have, in turn, produced explanations which suggest that alarmist voices are exaggerating the gravity of what is happening to the U.S. economy and failing to note the “naturalness” of most of these developments. For example, the midwestern farm belt would be much less badly off had not so many individuals bought land at inflated prices and excessive interest rates in the late 1970s. Again, the move from manufacturing into services is an understandable one, which is occurring in all advanced countries; and it is also worth recalling that U.S. manufacturing output has been rising in absolute terms, even if employment (especially blue-collar employment) in manufacturing in­dustry has been falling—but that again is a “natural” trend, as the world increasingly moves from material-based to knowledge-based production. Similarly, there is nothing wrong in the metamorphosis of American financial institutions into world financial institutions, with a triple base in Tokyo, London, and New York, to handle (and profit from) the great volume of capital flows; that can only boost the nation’s earnings from services.

    Even the large annual federal deficits and the mounting national debt are sometimes described as being not too seri­ous, after allowance is made for inflation; and there exists in some quarters a belief that the economy will “grow its way out” of these deficits, or that measures will be taken by the politicians to close the gap, whether by increasing taxes or cutting spending or a combination of both. A too-hasty attempt to slash the deficit, it is pointed out, could well trigger off a major recession.

    Kennedy twenty year ago cited two opposite points of view about problem of deficits and debt. Now Roubini manage to support both of them. And dr. Krugman, despite all experience of previous two decades, firmly on the optimistic side.
    Fabius Maximus replies: Trends continue because many people benefit from them, and refuse to see the potential harm from their continuation. Folks like Krugman see the need for federal spending at levels in excess of what the American people will pay in taxes. So they wave their hands and declare it just fine. That’s how great nations fall.

  12. Information certainly is pushing “to be free” — advertising supported, anyway; like TV broadcasts.

    Fab: “Social order, stability, a degree of social equity. All these and more are the products of government.

    Yes, gov’t is required: ‘to establish justice, provide for the common defense, promote the general welfare’… (US Constitution Preamble).

    Gov’t provided benefits/ entitlements are NOT the general welfare, they are specific to those receiving the benefit (SS check, farmer agro checks, welfare checks; even gov’t wage checks). In most entitlements, it is Other People’s Money.

    While federalism would be better than currently, what is truly needed is a rejection of using Other People’s Money (collected by gov’t force), to provide specific benefits. Instead, for middle class folks and richer, THEIR OWN money should be used — gov’t should have been requiring folk to contribute to their own retirement (defined contribution, not benefit), so they have valuable wealth to retire on. Similarly for health. Vouchers & loans for education. Requiring more job/ unemployment insurance premiums, especially for those who have gotten benefits (convert benefit receipt into a loan obligation). Etc. (My pie-in-the sky partial prescription).

    ONLY the gov’t is going to provide an army / defense against suicide bombers and foreigners with nukes. But the desire for the gov’t to provide health care, or education, or food, or housing — is essentially a desire ‘for a pony’ for oneself, that others pay for. And politicians bribe voters with these desired gov’t funded benefits — so it’s no wonder that such politicians are themselves open to being bribed, or to cheating on their taxes.

    Capitalism is a win-win, peaceful agreement to transfer property rights, where both sides are better off. Like one getting $100 mil in benefits they pay for, which only cost the well-organized produced $95 mil to make.

    Usually, the return on investment is positive — so there is more capital in the future. (Greed, the carrot, being the motivator). Gov’t programs involve force to collect taxes, at least, and often force to stop other services (like FedEx can NOT provide mail service, tho they’d like to); or a requirement to pay twice like in for gov’t schools (private school tuition PLUS taxes for the gov’t school). Gov’t programs in the US, and throughout the world, are win-lose, with usually negative rates of return. Like $100 mil. in benefits for only $120 mil in taxes.

    In the 80’s, despite Japan’s much higher savings rate, the US continued to lead on Return on Investment. The lead has increased since the Tokyo property bubble popped in 1989. Growth is dependent more on ROI and total investment (including borrowing), than on the savings rate. The more gov’t spends, the lower the ROI will be — as shown by historical examples.

    The elite continue to believe that ‘with the right guy’, or right wonk-program, gov’t ROI will be better. But there are virtually no big general examples. (Interstate highway construction is perhaps the best ROI investment in the US since WW II, and positive — thanks to empowering more private commerce.)

  13. Actually, Krugman is more in the DeLong camp: in the short term, its OK for deficit spending, but the long term it needs to be balanced.

    This is the classic Keynseyen countercyclic views: Run a surplus in good times so you can run deficit in the bad times.

    But no policitican in his right mind would do this anymore: Reagan got away with his huge tax increase in the later part of his second term, but George HW Bush did not. I’m suprised Clinton had as much fiscal restraint as he did, but that really ended with George W Bush, and Obama seems cut from the Bush policy mould.

  14. Re #8 — FM: “All these and more are the products of government.”

    Of course I meant production in the economic sense–it is clear from the context.

    FM: “Social order, stability, a degree of social equity.

    Yes, and these are or can be products of other institutions as well. I appreciate the humor but you have answered with a reductio ad absurdum argument that assumes no less than absolute abolition of the state.

    An absence of “government” in our sense of the word (the bloated Washington behemoth) is not even close to being equivalent to a total lack of social order. The elites there think that only they know what’s best for you, and the trend is not getting any better. Have a nice trip, indeed. Only this one is for all of us and it’s to the Worker’s Paradise.
    Fabius Maximus replies: My point was that you gave an absurdly narrow view of the State’s role. One shared by few Americans. And, I suspect, by you as well if you thought more deeply about these things. A little time in Somalia would highlight the role of government more clearly, IMO.

  15. Re 13: “Run a surplus in good times so you can run deficit in the bad times. But no politician in his right mind would do this anymore.”

    Actually, there’s quite of public acceptance for this rather common sense idea in my state, a place where they can’t just print money. Politicians here typically use it in their platforms.

    It was what state government did, at least until the new guys got in and wiped out a $3B surplus – even before the downturn hit. But lots of interest groups had to be paid off for their loyalty. Whoops.

  16. Which state is this, where they actually attempted counter-cyclic spending?
    Fabius Maximus replies: Singapore. Australian. Canada. Lot’s of places. Not every State is nuts, like us.

  17. I was speaking of Washington state but I don’t think it’s all that rare in state and local government. I’m not saying they all slash spending the bone in boom times but the responsible ones watch spending increases carefully so they can run surpluses to hold for the inevitable slowdown. The big killers are new recurring obligations vice one-time expenditures.

    Our city, for example, has a “rainy day fund” and they’ve avoided over-hiring in good times so they don’t cut jobs in bad.
    Fabius Maximus replies: State and local governments are bagatelles in our system.

  18. The system is clearly ill. We let the banks loot the treasury on the downswing while on the economic upswing we let them keep most of their profits while they generate or influence the next bubble. All the while we as a government ignore the fact that the middle class, that group which has been described as the engine of our and the world’s economy is in fact out of gas because of the greed of the banks, big business, and foolishness on the part of the middle class.

    What will happen in the next decade? I fear more of the same. Those college students like myself will graduate and wish to have decent jobs where the pay increases are equal to inflation, while in actuality we may likely find jobs that are well below our hopes. The main question I feel should be will the middle, working and lower classes look to communism, a modified capitalism or one of the fascist ideologies in terms of economic doctrine and who will they blame for the events of the past few years? Will it be a political party, the establishment, a class or ethnic group, etc? How these questions are answered and how we deal with the answers I suspect will determine what the character of the US will be in the coming years.

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