The Debt-Ceiling Debate

Watching the debt-ceiling debate currently taking place in Washington I am reminded of the 1955 James Dean movie “Rebel Without a Cause”. In the movie, James Dean’s character and his rival challenge each other to a game of “chicken”. In this game, the contestants drive their cars at full speed toward the edge of a cliff as a mob of teenagers looks on. The loser, or “chicken”, is the first contestant to lose nerve and stop his car or jump from it. The winner is the guy who remains in his car longest while hurtling toward the cliff. In this case the winner got his jacket sleeve caught on the door handle and drove off the cliff.

There are parallels between the movie and the debt-ceiling debate. The political parties are the contestants each driving their vehicle at full-throttle toward the cliff’s edge. The rest of us are the teenagers looking-on in a mix of fear and excitement. Unlike the movie, however, the onlookers in the debt-ceiling debate are tethered to the vehicles. If one of the parties decides to drive off the cliff, they take the rest of us with them.

The risks in the debt-ceiling debate are real and potentially catastrophic for the US. Most of the discussion among political observers and cable TV pundits is focused on the possibility of a US financial default. What none of these observers seem to recognize is that financial catastrophe does not require a US default. Failure to reach an agreement in Congress, in and of itself, may provide sufficient justification for debt-rating agencies to lower their current triple-A rating for US government obligations. If the US rating is lowered, interest rates will immediately begin to rise and both economic recovery and our ability to reduce the level of US debt will be made immeasurably more difficult, if not impossible.

A one-percent rise in interest rates would add $143 billion in annual interest to the US budget at current debt levels. If rates do start to rise no one could predict how high they will go. Consequences would be swift and painful. Current non-government holders of US debt would likely attempt to sell-off much or all of those holdings and traders would begin short-selling US obligations on world financial markets. The immediate result would be downward pressure on bond prices driving interest rates even higher. Foreign investors and governments, including China, would be highly reluctant to invest even more cash in US government obligations regardless of the interest rate.

Failure to reach an agreement to lift the debt-ceiling could create an economic catastrophe from which the US would never completely recover. The US would never again be viewed as a bastion of economic and political stability. We would join Greece, Portugal, Spain and Ireland in begging the rest of the world for economic rescue.

Our leaders should think carefully before deciding to drive us all off the cliff.

A Personal Note

Most people don’t sit around thinking about how they came to be the people that they are or why they think the way they do. I do think about these things, which is probably an indication that I have far too much time on my hands. Recent events have brought this topic to mind once again.

We are all products of our environments. We are shaped and molded by our life experiences and the people in our lives. We learn life lessons from our parents. Their thoughts and attitudes are lifelong influences on our own thoughts and attitudes. We get married and — for better or worse — are changed by our spouses. Teachers, coaches and other mentors influence the way we think and act. Even our children change us.

As with most people, my parents have been the primary influence on my life and I have learned many valuable lessons from them. Unlike most people, however, my life has been shaped by two sets of parents. My own parents brought me into this world. They loved and nurtured me and strove, to the best of their ability, to prepare me to live a happy and productive life. The other parental influence in my life has come from my wife’s parents. I first met them at the age of eighteen Being away from home for the first time and, probably looking for some kind of anchor, I eagerly latched on to them. For all practical purposes I moved in with them. I ate dinner with them most evenings. When I was ill, it was they who nursed me. They even took me on family vacations. I’ve often thought that, if I had been in their shoes, I would have thrown me out — but they didn’t.

While I’m sure they never intended to do so, my parents-in-law have had a considerable influence in shaping my own perspective on life. They were from a different place, a different country. Their life experiences were dramatically different from my own and those of my parents. The lens through which they viewed the world was different and their beliefs and attitudes reflected that difference.

It took me a while, but I finally came to realize that reality changes depending upon the lens through which you view it. There is not one reality, there are many. What seems obvious to me may not be so obvious to someone else. People tend to view the concept of war differently, for example, if they have had bombs dropped on them. Reality is shaped and colored by our own unique set of  life experiences and your reality — although I may not like it or agree with it — is just as valid as mine.

Just as I benefited from the lessons of my own parents, I have been the beneficiary of my parents-in-law’s life experiences. I am a better person today because of it.

I’m writing about this now because my mother-in-law is very ill and she doesn’t have much time left. My wife is with her and I wish that I could be. Instead, for now, I have to content myself with putting down in writing what she and my father-in-law have meant to me. I love her and I will miss her.

Free Markets — Be Careful What You Wish For

The term “free market” is one of the more widely misunderstood and misused terms in American politics. Republicans in general and Tea Partiers in particular have loudly and consistently proclaimed their unwavering devotion to the concept of free markets. They insist that things would be better for all of us if government simply “got out of the way of business”. Let the market work its magic. They should reconsider their position.

“Free market” is a political term, not an economic one. It implies a market free of government regulation. It is also a relative term. Markets completely free of regulation are nearly non-existent, but some markets are subject to much less regulation than others. Markets for most agricultural commodities, for example, are far less regulated than public utility markets.

Government regulates for two primary reasons: first, to protect the public health and welfare and second, to promote competition within markets. The first of these goals is easier to understand.  The Government imposes child labor laws and regulations preventing businesses from locating a hog farm in the middle of a residential neighborhood because we can all agree that these are good things to do. It requires businesses that process and handle toxic waste to possess the necessary skills and facilities because public safety is at stake.

The goal of promoting competition is more complicated. The problem is that free markets are generally not competitive markets. In most markets, stronger competitors engage in practices aimed at reducing or eliminating competition unless regulations are imposed to prevent them from doing so: they acquire or merge with other significant competitors, they prevent suppliers from selling to weaker competitors, threatening to discontinue their own purchases if the supplier continues to sell to those competitors, they engage in predatory pricing practices intended to drive weaker competitors out of business. In under-regulated markets there is typically an imbalance between the negotiating powers of buyers and sellers, with buyers at a distinct disadvantage. The net result is that, in under-regulated markets, consumers pay prices that are higher than those that could be charged in a more competitive market and the economy suffers as smaller firms are driven out of business and jobs are lost.

Americans should be very familiar with the abuses that occur when markets are not competitive. In a competitive market, OPEC could not artificially inflate the price of crude oil by restricting production, Americans would not pay higher prices than the rest of the world for pharmaceuticals because Medicare is not permitted to negotiate with manufacturers, mutual fund sellers could not tout the shares of one fund over others without disclosing to potential buyers that they receive a higher commission on the recommended fund, health insurance companies would be prohibited from colluding with each other in setting prices, Goldman Sachs would have to disclose to buyers of  certain mortgage bonds that the bonds were designed to fail so that a hedge fund manager could make tens of millions or even hundreds of millions of dollars by betting against them, etc., etc.

Like children, large corporations require limits. They are not immoral as claimed by some liberal elements of our society — they are amoral. Morality is not a significant factor in their decision-making process and, if it is present at all, it is usually trumped by economic considerations. Businesses pursue their own interests with zeal. They will bend any law, and occasionally break laws, in pursuit of those interests – even at the expense of public health and welfare. It is up to government to establish and enforce sensible boundaries within which businesses may operate. This is how the system works and indeed it is how the system must work.

When business catastrophes occur it is often as much a result of regulatory failure as it is a failure of business. Such was the case with the financial crisis of 2008. Over the preceding twenty-eight years Congress had systematically destroyed the regulatory system designed to prevent financial crises such as the ’08 debacle. At the same time they failed to reign-in new industry practices (i.e. derivative trading) that posed serious threats to the financial system.

Another example of regulatory failure occurred in the recent case of the Massey Mining disaster in West Virginia where twenty-nine miners died. Massey found it less expensive to pay fines rather than implement the safety measures demanded by regulators. While the actions of Massey were unconscionable — and possibly criminal, the regulator’s failure to act by shutting-down the mine was equally unforgivable

The regulatory pendulum has swung much too far in favor of big business. Politicians use the free market anthem to mask an underlying pro big business agenda. They want to protect the interests of the people and corporations that finance their campaigns. Democrats generally do a better job of disguising their efforts in this regard but many of them are just as guilty as their Republican colleagues.

The Tea Party’s call for free markets reveals a complete lack of understanding of markets and how they work. What they should be demanding are competitive markets.

The Lessons of Competitive Sport: Educators Take Note

“Show me a good loser and I’ll show you a loser”. “If winning didn’t matter they wouldn’t keep score”. Over the years I have heard these statements on more occasions than I care to remember from people that I don’t care to remember. Each time I hear them, I am disgusted. They represent a complete distortion of what competitive sport is all about and, for anyone within earshot, particularly young people; they communicate a very destructive message. The message delivered is that anything less than complete victory is failure. If you can’t win, don’t try.

The real lesson of the Olympic games is quite different. The media does a good job of disguising it, but if you can wade through the haze this is the message you should come away with; where individuals commit themselves to a goal, work hard and dedicate their efforts to the achievement of that goal, there are no losers – everyone wins. More than 2600 athletes from 82 countries showed up in Vancouver recently to compete for a total of 498 medals in 86 events, including team events. More than 80 percent of these athletes will leave Vancouver without a medal. Only about 5 percent will win gold medals. Many of the athletes may feel disappointment at not having fulfilled their Olympic dreams of a gold medal, but I’m sure that most walk away with a great sense of pride and satisfaction in knowing that have indeed accomplished an Olympic feat. Through hard work, dedication and grim determination they conquered the demons of pain and self-doubt and the confidence-crushing skepticism of others to become one of the very best in the world.

Most Olympic observers, including the media and those of us watching on TV, tend to focus on the medal count and the medal winners. The media never interviews non-medalists after an event, only the medal winners. We do the same thing in our schools by focusing on grades and, in so doing; we do our students a disservice. We discourage effort by those who feel they cannot win because they cannot perform at a high academic level. They fear failure and the judgment of others and, as long as they do, they will not risk trying.

The most important lesson that young students of all academic abilities can learn is not the subject matter taught in schools, but that there is value in putting forth an effort — of doing your absolute best — regardless of the grade you achieve. If you don’t get it right the first time, then keep trying, and keep trying until you do get it right. Success in life is far less dependent upon how smart you are than on how well you apply yourself to a task. All students can learn at some level and, with effort, learning will occur. As with the Olympic athletes, the personal satisfaction and sense of achievement gained from knowing that they have improved themselves through their own hard work and persistence is the greatest reward that any student can receive.

This lesson should be taught at home and at school. But to do it right, schools and parents must acknowledge that; what is important is not the achievement of a particular grade, but that progress is being made. The standard A, B, C, D, F grading system should be abandoned in favor of a system that measures the student’s advancement along a scale of knowledge for each subject or skill being taught. Only then will students understand that, with effort, they can make progress — they can win.

The American Challenge Revisited

In his 1968 book, “The American Challenge”, author J.-J. Servan-Schreiber, founder and editor of the French weekly L’Express, examined the sources of American economic dynamism in 1960’s Europe. It was American companies that moved aggressively to take advantage of the liberalization of European trade regulations created by the establishment of The European Economic Community (EEC) in 1958. They established European headquarters to manage their European operations. They built new plants and acquired European companies. They captured large shares of European markets while European businesses, with a few notable exceptions, sat on the sidelines.

Many European business and political leaders, including Charles de Gaulle of France, attributed the American economic expansion into Europe to the greater availability of capital in the U.S. vis-à-vis European nations that were still rebuilding after World War II. M. Servan-Schreiber disagreed sharply with this view, noting that ninety-percent of the expansion was financed by European sources. Instead, he saw American economic dynamism in Europe as a result of the dynamism of American society and a powerful academic-industrial-governmental partnership financed and led by the U.S. government.

America’s advantage, in M. Servan-Schreiber’s view, was both institutional and cultural. It was institutional in the sense that both government and academia were active participants in a mission to advance the interests of American business and society. The U.S. government funded fully 85 percent of American research and development costs and assisted key U.S. industries through contracts and research grants — governmental contracts accounted for more than 60 percent of revenue for the U.S. electronics industry. American universities provided a consistent source of innovation and invention as well as a steady stream of technological and managerial talent for U.S. businesses.

The most important and fundamental source of American economic dynamism, according to M. Servan-Schreiber, lay in its culture. More specifically, in the high level of social mobility (at least among whites) in U.S. society, the emphasis on individual responsibility and the commitment to equal rights and opportunity for all U.S. citizens. Underlying all of this was the willingness of Americans, including the U.S. government, to invest in human beings through education. Ultimately, according to historian Arthur Schlesinger, Jr. in the book’s foreword, Servan-Schreiber believed that, “The real American secret …is the discovery that social justice, far from being the enemy of economic growth, is the necessary technical condition for growth in an industrial society”.

What a Difference Four Decades Make

Fast forward to 2009. M. Servan-Schreiber would be stunned to see that America has all but abandoned the model he so highly admired. The partnership between government, business and academia that was so effective in the 1960’s no longer exists. The burgeoning middle-class that was America’s engine for economic growth is in decline as the income gap between the top 10 percent of American society and the bottom 90 percent grows. Social mobility is now lower in the U.S. than in any other industrialized nation. A person born today in France, Germany, Sweden, etc., would have a better chance of improving their economic and social status than a person born in the U.S.

Sowing the Seeds of Socialism

Slowly but surely, we are witnessing our own economic and social demise. The end result will be a European style socialist system for the U.S. — a prospect that strikes fear into the hearts of American conservatives.  However, if the bottom 90 percent of Americans continue to lose ground economically, they will eventually begin to demand more government programs to fill the income gap. Their frustration will be exercised at the polls and, since there are substantially more of them, they will prevail. Conservatives will naturally blame liberals for this development, but it will be conservative policies that have caused it.

The Influence of Money and Conservative Philosophy

America’s declining economic and social conditions are attributable to two fundamental causes: the influence of money in U.S. politics and public policy, and conservative economic and social policies. American politics have become a battleground for financially powerful special interests on both the right and the left. These special interests wage political war by filling the campaign coffers of politicians and, with the assistance of these politicians, inundating American voters with misleading and frequently false political information designed to “spin” the facts in their favor rather than enlighten voters. The special interests have usurped the sovereignty of American citizens. Instead of government “of the people, by the people”, it is now government of the people, by special interests.

Since President Reagan took office in 1981, U.S. economic and social policy has generally reflected conservative political philosophy. Even during the Clinton presidency, conservatives controlled congress and were usually able to thwart Clinton proposals that did not suit them. Over the years this philosophy has mutated to become even more conservative. Today’s conservatives call themselves Reagan conservatives, but they represent attitudes and ideas that even President Reagan would be unlikely to support. Real Reagan conservatives, such as political columnist George Will, frequently try to distance themselves from today’s self-styled Reagan conservatives. The truth is, today’s conservatives are, for the most part, Limbaugh conservatives.

Current conservative philosophy is backward looking. Resistance to change under this philosophy is insufficient. It actually seeks to turn the political and social clocks back — in some cases to the 19th century. The philosophy is pro-business, yet anti-growth. Rather than supporting investment in technologies of the future, it seeks to protect old technologies and their purveyors from competition. It rejects any role for government. Conservatives see conspiracies around every corner, including academia. Conservatism purports to be a free market philosophy, yet its practitioners oppose regulation that would open markets to greater competition –Americans pay higher prices for prescription medications than citizens of any other country because these free marketers deny the Medicare system the ability to negotiate with pharmaceutical companies.

Conservative tax policy is designed to redistribute income upward to the very richest Americans. Profits from trading securities and derivatives –activities that contribute nothing to real economic growth — are taxed at a lower rate than wages from an individual’s labor. Incredibly, conservative tax policy provides favorable capital gains treatment for purchases of foreign manufactured capital equipment. The predictable results of these policies are a declining middle-class and slower economic growth.

So What Do We Do Now?

The combination of conservative philosophy and special interest money has stifled U.S. economic and social progress. But it is not too late to reverse this trend and set the nation back on the right track. It will require moving away from conservative philosophy toward a more centrist political philosophy — liberal philosophy is no better than conservative. Furthermore, Americans must be more skeptical of the information they receive from politicians and other sources and demand that politicians reject the corrupting influence of special interest money.

Cheney says Obama is a U.S. citizen

Dick Cheney has finally settled the argument. In an interview yesterday in his suburban Washington home, the former Vice President said that President Obama is a citizen of the U.S.

Well, OK, he didn’t say it directly. But he did say that President Obama has provided aid and comfort to America’s enemies, which is — by definition — treason, and you cannot commit treason against the U.S. unless you are a citizen of the U.S.

Thank  you Mr. Cheney. We can now move on to more important things — like the conspiracy to establish a global government going on in Coppenhagen.

Obama’s Second Stimulus Plan

The capacity for mind-numbing stupidity in Washington never ceases to amaze. The most recent reminder of this unfortunate tendency is contained in President Obama’s latest proposal for stimulating the U.S. economy. Incomprehensibly, President Obama plans to introduce, among other measures, a series of tax cuts and credits for small businesses to stimulate the economy.

In spite of bi-partisan congressional support for small business tax cuts,  this tactic will have no stimulative effect on the nation’s economy. Tax cuts are of value only if businesses are making money and paying taxes. Businesses that are suffering from a lack of revenue are unlikely to hire new employees, or retain existing employees, because of a tax cut or credit. Exactly how this fact escapes the attention of the President’s economic advisors is puzzling indeed.

While the country has officially exited the recession, it remains on economic life support. Unemployment is unacceptably high at approximately 10%. Credit is scarce for both individuals and businesses. The nation’s housing market is still in the doldrums as the foreclosure crisis grows. The commercial real estate market is crashing and many state and local governments are poised on the brink of bankruptcy.

In the face of the continuing economic crisis the Government must provide additional economic stimulus. Without such stimulus, the economy will dip back into a recession that will prove even more difficult to escape. If this happens, the cost of the additional economic stimulus will look cheap compared with the cost of a prolonged recession.

To be sure, there are good aspects to the President’s proposal. Investing in infrastructure and technology will create jobs immediately, increase public confidence and produce a substantial ripple effect throughout the economy. This should have been done the first time around instead of turning the money over to governors who used it to pay bills.

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