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Canwest News Service
Washington's massive spending stimulus and money-supply expansion have staved off the feared collapse into depression. But unemployment has continued to rise, and the economy has not really revived. Americans, who'd been encouraged by their fiscal and monetary guardians for over a decade not to save anything, but to binge on unaffordable housing and non-essential goods whose production had been outsourced to China and Japan, have rediscovered the virtues of savings. Banks, heavy-laden with the taxpayers' money, are still too shell-shocked to lend, and the public is too shaken to spend. Personal and corporate loans are being sensibly paid down, to a large extent with money created for the occasion by the Federal Reserve.
Within this deepening vortex, the vast and unedifying battle over health care has raged and stormed, as the ambition to assure that all have health-care insurance has been overtaken by the debate about costs. Medical care in the United States costs about US$3,000 per capita more than in other advanced countries. Switching course in mid-tempest, the administration claimed that it would reduce medical costs by meddling with the insurance plans of those already covered. The cost-conscious didn't believe it, and those concerned about covering the uninsured were unimpressed.
Cost is a dominant issue in large part because the US$787-billion stimulus bill was a disaster — a riot of children left to ransack the candy store and gorge themselves. It stuffed money into the districts of prominent Democrats in Congress (on a delayed trip wire to coincide with upcoming elections), but has been a very inefficient job-creator. (In fact, the whole concept of stimulus is bogus, as the borrowing of the money consumes at least as much stimulus as it generates.)
With Social Security, Medicare, the FDIC and the Federal Reserve itself now confronting appalling debt scenarios (the Fed's loans and other advances, some of them vulnerable, are backed by hard assets of only about half of 1% of the quantum of the obligations), the administration projects trillion-dollar annual deficits a decade out. Obviously, the Chinese and Japanese are not going to go on buying this debt, and have already moved much of what they hold to short-term Treasuries, to translate into U.S. assets at knockdown prices. To sell on any real market any serious amount of this debt in the next decade would require torqued-up interest rates, which would be steroids for bulging debt and inflation rates, while strangling economic growth.
The present health-care bills include large tax increases. The proposed cap-and-trade bill to reduce carbon emissions, moreover, would pile increased heating and air conditioning costs on homeowners and employers, but would neither reduce emissions nor raise government revenues. The whole program is based on the unproved eco-terror arguments that have made Al Gore a Nobel Prize laureate and centimillionaire. The bill is ill-conceived, if not insane.
Contemplation of debt on the scale now envisioned, plus negligible interest rates, have driven up the price of gold, undermined the dollar and pushed the stock market to unnatural highs of 17 times anticipated (tax-loss-increased) cash flow. It has also produced destabilizing flights of capital to Brazil, Canada, Australia and China, all of which are coming through (provisionally, in China's case) the recession well. The first three are natural resource exporters; China the low-cost manufacturer, exporter, saver and lender; the United States the borrower and consumer, i.e. the chump. American leaders should embrace the prospect of an investment-based, rather than consumption-based, economy — not lamenting that people aren't throwing their savings out of the windows buying mainly foreign-produced goods.
Everyone should recognize that the issuance of trillions of dollars not representing any new production or value will generate inflation eventually. From 2004 to the present, U.S. federal unfunded liabilities increased by 50%, while revenue increased by 12%, and that unfunded obligation has increased by US$9-trillion this year alone. The U.S. annual federal deficit is 13.5% of GDP, and the fact that most other advanced countries are in an only slightly less distressed condition by this measurement, is no consolation. It just increases the vulnerability of the whole system.
What is to be done?
On health care, what should happen (though there is little likelihood that much of it will) is the passage of a bill that expands coverage for those not covered, caps malpractice awards other than in extreme circumstances, reduces the need for legal vulnerability-avoidance preemptive measures, unites the consumer with the payer by providing a tax credit for anything beyond basic care, and taxes extensive employer coverage in the hands of the recipient. This would require the government to stand up to the lawyers and unions at the same time, an unlikely rush of political courage, especially for the Democrats.
The economic recovery is too soft to turn off the spigot now, but the 70% of the stimulus package that has not been spent should be scrapped and partially replaced with a payroll tax cut. Cap-and-trade should be dropped sine die, and tax increases should be confined to three measures: (1) a serious gasoline tax, with rebates to those who make their living in gasoline-intensive occupations such as trucking. This would incentivize conservation, reduction of oil imports and aggressive pursuit of new domestic sources of energy. (2) There could also be a tax on securities trades and merchant banking transactions and related professional expenses. These activities have been horribly over-indulged, scandalously over-compensated, have attracted too many talented people and have led to too many bad deals that should not have been done. (3) A small, self-terminating wealth tax on very large fortunes could be imposed to provide funds for those taxpayers to engage in legitimate anti-poverty projects they would devise themselves and have certified, like charities. The tax would decline as sensibly defined poverty declined, and would evaporate when poverty did. The greatest commercial minds in the private sector would have a vested interest in eliminating poverty and would produce a variety of imaginative methods of doing so.
The U.S. political process must stop its infantile wrangling and show cause for the world to believe that it will defend the financial integrity of the country, before discussion of U.S. default, which will otherwise become audible soon, spooks the whole world.
cbletters@gmail.com – This is adapted from a longer article that appeared on National Review Online.
