Passing On Economic Update

[DonMackenzie]

Since I cannot weed through all data on USA economics, I thought others might feel the same. A trusted source forwarded this text to me so I'm passing it along without any comment:

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July 31, 2010 Four Deformations of the Apocalypse By DAVID STOCKMAN

IF there were such a thing as Chapter 11 for politicians, the Republican push to extendthe unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation's public debt ? if honestly reckoned to include municipal bonds and the $7 trillion of new deficitsbaked into the cake through 2015 ? will soon reach $18 trillion. That's a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity andsacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, toinsist that the nation's wealthiest taxpayers be spared even a three-percentage-point rate increase.

More fundamentally, Mr. McConnell's stand puts the lie to the Republican pretense thatits new monetarist and supply-side doctrines are rooted in its traditional financialphilosophy. Republicans used to believe that prosperity depended upon the regular balancing of accounts ? in government, in international trade, on the ledgers of centralbanks and in the financial affairs of private households and businesses, too. But thenew catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance ? vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

This approach has not simply made a mockery of traditional party ideals. It has also ledto the serial financial bubbles and Wall Street depredations that have crippled our economy. More specifically, the new policy doctrines have caused four greatdeformations of the national economy, and modern Republicans have turned a blind eyeto each one.

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with theworld. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit ? the combined shortfall on our trade in goods,services and income ? has reached nearly $8 trillion. That's borrowed prosperity on an epic scale.

It is also an outcome that Milton Friedman said could never happen when, in 1971, hepersuaded President Nixon to unleash on the world paper dollars no longer redeemablein gold or other fixed monetary reserves. Just let the free market set currency exchangerates, he said, and trade deficits will self-correct.

It may be true that governments, because they intervene in foreign exchange markets, have never completely allowed their currencies to float freely. But that does not absolveFriedman's $8 trillion error. Once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money anddisregard their neighbors.

In fact, since chronic current-account deficits result from a nation spending more than itearns, stringent domestic belt-tightening is the only cure. When the dollar was tied tofixed exchange rates, politicians were willing to administer the needed castor oil, because the alternative was to make up for the trade shortfall by paying out reserves,and this would cause immediate economic pain ? from high interest rates, for example. But now there is no discipline, only global monetary chaos as foreign central banks runtheir own printing presses at ever faster speeds to sop up the tidal wave of dollars coming from the Federal Reserve.

The second unhappy change in the American economy has been the extraordinary growth of our public debt. In 1970 it was just 40 percent of gross domestic product, or about $425 billion. When it reaches $18 trillion, it will be 40 times greater than in 1970. This debt explosion has resulted not from big spending by the Democrats, but insteadthe Republican Party's embrace, about three decades ago, of the insidious doctrine that deficits don't matter if they result from tax cuts.

In 1981, traditional Republicans supported tax cuts, matched by spending cuts, to offsetthe way inflation was pushing many taxpayers into higher brackets and to spur investment. The Reagan administration's hastily prepared fiscal blueprint, however, wasno match for the primordial forces ? the welfare state and the warfare state ? thatdrive the federal spending machine.

Soon, the neocons were pushing the military budget skyward. And the Republicans onCapitol Hill who were supposed to cut spending exempted from the knife most of thedomestic budget ? entitlements, farm subsidies, education, water projects. But in theend it was a new cadre of ideological tax-cutters who killed the Republicans' fiscal religion.

Through the 1984 election, the old guard earnestly tried to control the deficit, rollingback about 40 percent of the original Reagan tax cuts. But when, in the following years,the Federal Reserve chairman, Paul Volcker, finally crushed inflation, enabling a solideconomic rebound, the new tax-cutters not only claimed victory for their supply-sidestrategy but hooked Republicans for good on the delusion that the economy willoutgrow the deficit if plied with enough tax cuts.

By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of grossdomestic product, lower than they had been since the 1940s. Then, after rarely vetoinga budget bill and engaging in two unfinanced foreign military adventures, George W.Bush surrendered on domestic spending cuts, too ? signing into law $420 billion innon-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of afree-lunch fiscal policy.

The third ominous change in the American economy has been the vast, unproductiveexpansion of our financial sector. Here, Republicans have been oblivious to the gravedanger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combinedassets of conventional banks and the so-called shadow banking system (includinginvestment banks and finance companies) grew from a mere $500 billion in 1970 to $30trillion by September 2008.

But the trillion-dollar conglomerates that inhabit this new financial world are not freeenterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not beengovernment-guaranteed and if they hadn't been able to obtain virtually free money from the Fed's discount window to cover their bad bets.

The fourth destructive change has been the hollowing out of the larger Americaneconomy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore. In the past decade, thenumber of high-value jobs in goods production and in service categories like trade,transportation, information technology and the professions has shrunk by 12 percent, to68 million from 77 million. The only reason we have not experienced a severe reductionin nonfarm payrolls since 2000 is that there has been a gain in low-paying, often part-time positions in places like bars, hotels and nursing homes.

It is not surprising, then, that during the last bubble (from 2002 to 2006) the top 1percent of Americans ? paid mainly from the Wall Street casino ? received two-thirds of the gain in national income, while the bottom 90 percent ? mainly dependent onMain Street's shrinking economy ? got only 12 percent. This growing wealth gap is not the market's fault. It's the decaying fruit of bad economic policy.

The day of national reckoning has arrived. We will not have a conventional business recovery now, but rather a long hangover of debt liquidation and downsizing ? as suggested by last week's news that the national economy grew at an anemic annualrate of 2.4 percent in the second quarter. Under these circumstances, it's a pity that themodern Republican Party offers the American people an irrelevant platform of recycledKeynesianism when the old approach ? balanced budgets, sound money and financialdiscipline ? is needed more than ever.

David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, is working on a book about the financial crisis.