One of our great misfortunes is that all of the world’s leaders seem to have a stake in proclaiming that the end of the world is near. President Barack Obama is touring the country telling audiences that unless Congress passes his new jobs bill -- the word “stimulus” is considered too laden with memories of past failures to be usable by the president -- we will almost certainly collapse into another recession. Republican leaders respond by saying unless the president changes his policies or, better still, the nation changes its president, we will fall ever further into debt, with living standards spiralling downward. In Europe, the powers-that-be are saying that unless Italy, Greece and others change their profligate ways, and German chancellor Angela Merkel keeps her nation’s purse open indefinitely to provide a Berlin backstop, the eurozone will collapse and with it the international banking system. And World Bank president Robert Zoellick returned from China to tell those of us here in Washington that the world has entered “a new danger zone with little running room… Unless Europe, Japan, and the United States … face up to responsibilities they will drag down not only themselves, but the global economy.”
Zoellick's news was best of all. He was making an important point: The fault is not in our stars, but in ourselves. Our problems stem not from any intrinsic flaw in free market capitalism, nor from some historically determined collapse of Western economies, but from terrible policies -- made by man, and capable of being undone by man.
In America, these policies have resulted in a progressive reduction in living standards, or at least in a failure of those standards to continue rising. No longer do Americans confidently believe that each generation will live better than the next. Indeed, many parents are finding that the next generation is returning to share bed and board with them, either because they can’t afford their own places, or to share in the cost of their parents’ upkeep. The number of Americans between the ages of 25 and 34 living with their parents rose to 5.9 million this spring from 4.7 million before the recession, or from 11.8 percent of that age group to 14.2 percent.
Last year was the third successive year in which household incomes fell and, adjusted for inflation, now stands about where it was 15 years ago. Worse still, the typical full-time male worker now earns (again, adjusted for inflation) no more than he did over 40 years ago. Some 25 million Americans are looking for full-time work, and official forecasters are saying that situation is unlikely to improve very much in the next year or so. The deficit-to-GDP ratio is unsustainable, the total accumulated debt is now at a level that scholars say will stifle long-term growth, an increasing number of families are being evicted from or simply abandoning homes they can no longer afford, a new round of layoffs is underway in the financial sector, the earnings outlook for American manufacturers is deteriorating, and retail sales are stagnant.
Meanwhile, for the first time, an American treasury secretary felt it necessary to sit in on a meeting of EU finance ministers (technically, Europe’s Economic and Financial Affairs Council, or ECOFIN), and flew to Poland to share with his European counterparts the wisdom of an administration that has presided over the first-ever downgrading of American debt. This, after German chancellor Angela Merkel and French president Nicolas Sarkozy had traders riveted to their screens awaiting the outcome of a conference call between them and Greek prime minister George Papandreou, the result of which was the reassuring statement that all agreed Greece should somehow honor its obligations and stay in the eurozone. Just how that is to be accomplished is left for another of the meetings in which eurozone leaders specialize.
John Maynard Keynes, perhaps one of the generation’s greatest economists, famously wrote, “Practical men, who believe themselves to be quite exempt form intellectual influence, are usually the slaves of some defunct economist.” Including him. President Obama thinks he is being a loyal Keynesian when he proposes borrowing some $447 billion to create jobs, mostly in Democratic states that have been so profligate that they are over-borrowed, out of cash, and laying off teachers and firemen. Never mind that there is no way of knowing whether that is what Keynes would have recommended for a heavily indebted country that had tried a similar program only to find the unemployment rate rise rather than fall.
Since the president proposes to fund this with a tax increase, Republicans will have none of it. Those tax increases are aimed primarily at everyone earning more than $200,000 -- so much for hitting “millionaires and billionaires” -- as the president describes his tax plan, and will not take effect until after the 2012 election. They represent a de facto repeal of the Bush tax cuts for “the rich,” would provide about $400 billion over ten years to make up for the new spending. The much heralded attack on corporate jets, using the weapon of extending the depreciable life of these planes, will hardly shoot any down, and will yield $3 billion over ten years.
The pity is that in private all serious American politicians know that tax loopholes must be eliminated—Obama has sensibly proposed removing the special low rates paid by hedge fund managers -- so that overall corporate tax rates can be lowered; that there aren’t enough millionaires and billionaires to fill the gaping hole in America’s finances; that it must be made attractive for corporations to repatriate earnings held overseas; that regulations that stifle small business growth must be repealed; and that America has no way of meeting its current health care promises to pensioners and others, much less the more costly Obamacare version.
America is not alone in knowing what to do and being unable to do it. All of China’s new generation of leaders know they cannot for much longer sustain their export-led, environmentally degrading, currency manipulating policies. But they fear that allowing their currency to rise will cut exports and cause socially destabilising unemployment and downward pressure on wages. All of Europe’s leaders know that they cannot continue to lurch from meeting to meeting, and crisis to crisis, and must find a way of recapitalising their banks and persuading Germans to make their balance sheet and top-notch credit standing available to its weaker eurozone partners—in perpetuity.
Zoellick warned these slaves of defunct economists -- from Karl Marx and collectivists, to Keynes and deficit spenders, and Milton Friedman and pure monetarists -- that “we must change our old concepts and constricting labels…”. His conclusion is worth noting:
With credible and definitely possible action - not just short-term fixes - on debt and deficits to restore confidence, and with … structural and tax reforms to spur sector growth, boost productivity, and create jobs, advanced economies can … power ahead. Predictions of inevitable stagnation and decline -- from the Central European pessimism of Oswald Spengler to the stagnation hypothesis of the distinguished Harvard Keynesian Alvin Hansen -- have time and again proved to be wrong.”
I couldn’t say it better, so I won’t try.