The United States is coming into 2009 having established one of the largest moves to socialization in the world. The prospects for the future do not provide any encouragement for this move to slow down!
The United States has moved into a new era…and who would have thought that it would be the Conservatives in America that created the environment for this to happen.
The Conservatives were always the people who believed in discipline…of not living beyond ones means and capabilities. Yet, it became the Conservatives that led the way to uncontrolled and irresponsible behavior…on the part of the government…and on the part of the private sector.
When did it start?
When Nixon claimed that “We are all Keynesians now!”?
Did this lead to the policies of Ronald Reagan who promoted Supply-Side tax cuts that led to large deficits that went on and on?
And this led to Bush 41 and Bush 43 and their undisciplined fiscal behavior?
The Republican Party…like most parties…is a conglomerate of groups with disparate or even conflicting positions. But, Nixon drew up the new boundaries of the party and created the new culture at the top. And, what were these new boundaries?
I would like to concentrate on three: making the Republican Party the party of the South and the religious conservative; the move to fiscal and monetary irresponsibility; and the emphasis upon loyalty to creed as the primary criteria for membership.
There is no question that the Nixon “Southern Strategy” became the foundation of the ‘new’ Republican Party. Lyndon Johnson basically disenfranchised the South with his policies on civil rights and welfare. These programs completed upset the social stratification of the South and caused many citizens of that part of the country to look for a new home.
Richard Nixon provided them with that new home. But, in doing so the Republican Party had to be open to two things…even if they were sublimated in all discussions concerning the party. These two things were, first, that the party had to accept the racist leanings of the Southerners that were brought in under the ‘big tent’, and, second, the party had to openly support a religious leaning that was more fundamentally orientated. Up until the late sixties, the Republican Party had been the home of the mainline Protestant denominations. That was to be no more…they were ‘too liberal’.
These two themes brought in the South and also appealed to more rural areas of the United States. This provided a background for ascending to the Presidency, but also to provide a strong bloc of support in both the Congress in Washington, D. C., and in state houses throughout the country. It also provided a funnel for future leaders of the Party.
The second boundary had to do with the economic policies of the Federal Government. Nixon was so paranoid about getting re-elected as President that he did whatever was necessary…the rest-of-the-world be damned. Consequently, the conservative policies of ‘hands off’, constraint, and discipline did not appeal to him. This made him susceptible to advisors around him…especially John Connolly…that led him in a totally different direction. That direction included ideas about ‘big government’, deficits in the budget, wage and price controls, and an easy monetary policy. And, the last item there was connected to the withdrawal of the United States from the gold standard that served as the basis for stable economic policies. Even Franklin D. Roosevelt did not dare get rid of this peg during the Great Depression.
Richard Nixon became a “Big Government” President opening the door for a succession of ‘Conservative’ big government presidents…like Ronald Reagan (a former Democrat), Bush 41, and Bush 43. And, “Big Government” for the Republicans included building up the military…for this was the patriotic thing to do. American was the leader of the free world and therefore it needed more and more resources for the military.
The problem with “Big Government” is that taxpayers in the United States will generally not support the taxes needed to run a big government so that the big government will have to be financed by selling bonds…or monetizing the debt. Nixon did both…but, to combat the possibility that inflation could get worse he also froze wages and prices in the economy.
Whoa ! ! !
The third boundary had to do with loyalty. Since the things discussed above became the ‘religious’ beliefs of the Republican leadership, adherence to the ‘religion’ became paramount…no matter how ridiculous the stance one had to take. Loyalty to the line became the most important criteria for membership in the leadership.
And, this loyalty transcended talent, ability, or experience. If you did not believe the way the Party did…you had no chance to help the Party regardless of how good or how successful you were. How else can we explain the incompetence of the Bush 43 administration? How else can we understand the ignoring of facts and of reality? How else can we explain the lies and the cover-ups?
In the past, the Conservatives were always the Party of reality, the Party of discipline, the Party of incremental movement.
I think that these Conservatives can now say…”We told you so!”
I think that these Conservatives can now say…”If you lose your discipline, you will eventually crash!”
I think that these Conservatives can now say…”Once you crash because you have lost your discipline, there are no good choices!”
I think that these Conservatives can now say…”There is only one way to ‘right the ship’ and that is by re-establishing your discipline!”
I think that these Conservatives can now say…”Re-establishing your discipline is VERY, VERY painful!”
Showing posts with label Fiscal policy. Show all posts
Showing posts with label Fiscal policy. Show all posts
Wednesday, January 7, 2009
Wednesday, March 19, 2008
Establishing Discipline: Over Fundamentals or Over Ideology
The United States is facing a very difficult situation currently due to the economic policies the Bush Administration has followed over the past seven years or so. To begin with, the Bush Administration came into office with the Federal budget in surplus and with the Federal Reserve following a relatively disciplined monetary policy. In a sense, the fiscal and monetary house of the United States government was in order.
Basically, the new administration decided to go it alone. That is, it would conduct its economic policy independently of the rest of the world. This was not inconsistent with what the administration was doing in other areas, such as foreign policy. Its first major economic policy action was to construct and then get Congress to pass a substantial tax cut. This, of course, would throw the Federal budget into a deficit, but, the feeling was that this tax cut would stimulate the economy and create sufficient revenues in the future to reduce the deficit and make it manageable. Also, there was some talk about slowing down the growth, or even eliminating some expenditure programs and this would further help to eliminate the deficit. The tax bill was passed.
In devising its fiscal plans, the administration did not anticipate the events of September 11, 2001 and its aftermath. Not only did these events precipitate a ‘war of terror’, they also resulted in one war in Afghanistan and another in Iraq. The expenditure side of the budget grew very rapidly. Furthermore, all three ‘wars’ left open a future commitment to an unpaid bill that was enormous. Occurring at about the same time all this was happening, the Federal Reserve was setting its operating target for the Federal Funds rate at 2% or below for a period of over 3 years. Given the rate of inflation during this time, this meant that the real rate of interest on these short term loans was negative.
The value of the United States dollar began to drop in 2002. World markets were concerned about how the Bush Administration was acting independently of the rest of the world and that they were not playing by the ‘rules’ of international finance. The most basic rule of international finance is that one country cannot ‘inflate’ its economy for its own purposes without a consequent decline in the value of its own currency in foreign exchange markets. This is just a fundamental result of how markets work. But, in the past, the United States being as big and powerful as it was, could get away from acting independently of these rules. This is no longer the case.
As the value of the dollar declined in foreign exchange markets, the Bush Administration gave lip service to the fact that the dollar was falling in value, but did nothing about it. As a consequence, the dollar continued to decline, falling by about 7% a year against the Euro between 2001 and 2007. It also fell by over 5.5% per year against the British Pound. The day of reckoning has finally appeared.
Historically, all countries that once had significant economic and financial positions in the world, except the United States, faced a transition from being able to act relatively independently of the rest of the world and having to abide by the workings of international markets. As countries moved from the former position of relative independence to disciplined cooperation, they went through a period of learning. During this period, the country in question would find that as it attempted to act independently of world markets through the creation of budget deficits that were eventually monetized by its central bank, ‘international bankers,’ an ambiguous and anonymous clandestine group of money managers, would start selling their currency until the drop in value became significant enough that the government had to back off its fiscal and monetary policies and establish a sound and disciplined program going forward.
The United States now seems to be in this transition position. The world has changed and it is no longer the world power it used to be. Yes, it is still powerful and important but due to globalization and the reliance of the world on oil it is not as important as it once was. As a consequence, the rest of the world is now showing the United States that it must join the club, it must humble itself enough to be realize that it must work with others and not just act as it wishes.
This is the background of the point I would like to make about the working of governments. The Bush Administration constructed its economic policy on the basis of an ideology. This ideology came from the presidential administration of Ronald Reagan. It is founded upon the premise that it is always good to cut taxes. In the past, this premise was presented along with the idea that programs should be cut as well in order to maintain fiscal discipline and reduce the size of the government. However, this latter component fell to the wayside when the proponents of ‘small government’ found that it was not practical or feasible to cut programs from the budget. Thus, only the first part of the ideology remained. Cutting taxes is good!
‘Conservatives’ and the Bush Administration stuck to the ideology. It brought in people to work in the administration that were loyal to the ideology. And, they enacted their tax cut and everybody was happy…on the ‘conservative’ side of the aisle. Discipline was rampant, but the discipline was to enforce adherence to the ideology regardless of the consequences of the impact of its execution. Furthermore, we see this imposed discipline carrying through to the campaign to become the Republican nominee for President in the 2008 election. Candidates went through unbelievable loops to sound convincing that they would continue the Reagan policy of cutting taxes if they were elected President. All seemed intent on becoming the next Ronald Reagan and they fought over who was the most representative of the Reagan tradition.
The problem is that the times have changed. The fundamentals are different now than they were 15 years ago let alone 28 years ago. The United States is not in the position it once was and must respond to the new fundamentals. The market imposes discipline upon those that operate within the market system. There is now enough wealth and power held outside the United States so that the United States must respond to this discipline and impose the discipline upon itself. This is all a part of being just one among many. One must pay attention to the wishes and needs of others. Within such an environment one must conform to the rules and become a good citizen.
This insight applies more than just to the ‘most powerful nation in the world.’ It also applies to those who hold power locally or regionally. Yes, the United States has been arrogant in attempting to impose its will on the world, but others have also been arrogant in attempting to impose their will on their ‘limited’ worlds. The attempt to impose an ‘ideology’ on others and the discipline that is applied to establish or maintain an ‘ideology’ on others is doomed to failure over the longer run. The problem is that the attempt to enforce the ‘ideology’ in the short run can have many dire consequences. The ‘ideology’ of the Bush Administration was related to tax cuts. The ‘ideology’ of others relates to ‘political correctness.’ The ‘ideology’ of others relates to Islamic fundamentalism. And, we can go on, if needed, to identify many more ‘ideologies’ that are alive in the world today.
What I am more interested in is the discipline that is necessary to be aware of and respond to the ‘fundamentals’ that exist in the world. I am not a post modernist. I do not believe that any worldview works and it is just a matter of who is in power. In the case of the economic policy of the United States and the decline in the value of the dollar…markets do work, some better than others, but, they do work. As a consequence, people, governments, and other organizations must operate within the boundaries and limits of being in a world with other people, governments and other organizations. This takes discipline, but it is a discipline that responds to and operates within the ‘fundamentals’ of the world. Some things, some models, some worldviews do work better than others. We must discipline ourselves to achieve the goals and objectives that are dear to us but we must do this in concert with the way the world works.
Basically, the new administration decided to go it alone. That is, it would conduct its economic policy independently of the rest of the world. This was not inconsistent with what the administration was doing in other areas, such as foreign policy. Its first major economic policy action was to construct and then get Congress to pass a substantial tax cut. This, of course, would throw the Federal budget into a deficit, but, the feeling was that this tax cut would stimulate the economy and create sufficient revenues in the future to reduce the deficit and make it manageable. Also, there was some talk about slowing down the growth, or even eliminating some expenditure programs and this would further help to eliminate the deficit. The tax bill was passed.
In devising its fiscal plans, the administration did not anticipate the events of September 11, 2001 and its aftermath. Not only did these events precipitate a ‘war of terror’, they also resulted in one war in Afghanistan and another in Iraq. The expenditure side of the budget grew very rapidly. Furthermore, all three ‘wars’ left open a future commitment to an unpaid bill that was enormous. Occurring at about the same time all this was happening, the Federal Reserve was setting its operating target for the Federal Funds rate at 2% or below for a period of over 3 years. Given the rate of inflation during this time, this meant that the real rate of interest on these short term loans was negative.
The value of the United States dollar began to drop in 2002. World markets were concerned about how the Bush Administration was acting independently of the rest of the world and that they were not playing by the ‘rules’ of international finance. The most basic rule of international finance is that one country cannot ‘inflate’ its economy for its own purposes without a consequent decline in the value of its own currency in foreign exchange markets. This is just a fundamental result of how markets work. But, in the past, the United States being as big and powerful as it was, could get away from acting independently of these rules. This is no longer the case.
As the value of the dollar declined in foreign exchange markets, the Bush Administration gave lip service to the fact that the dollar was falling in value, but did nothing about it. As a consequence, the dollar continued to decline, falling by about 7% a year against the Euro between 2001 and 2007. It also fell by over 5.5% per year against the British Pound. The day of reckoning has finally appeared.
Historically, all countries that once had significant economic and financial positions in the world, except the United States, faced a transition from being able to act relatively independently of the rest of the world and having to abide by the workings of international markets. As countries moved from the former position of relative independence to disciplined cooperation, they went through a period of learning. During this period, the country in question would find that as it attempted to act independently of world markets through the creation of budget deficits that were eventually monetized by its central bank, ‘international bankers,’ an ambiguous and anonymous clandestine group of money managers, would start selling their currency until the drop in value became significant enough that the government had to back off its fiscal and monetary policies and establish a sound and disciplined program going forward.
The United States now seems to be in this transition position. The world has changed and it is no longer the world power it used to be. Yes, it is still powerful and important but due to globalization and the reliance of the world on oil it is not as important as it once was. As a consequence, the rest of the world is now showing the United States that it must join the club, it must humble itself enough to be realize that it must work with others and not just act as it wishes.
This is the background of the point I would like to make about the working of governments. The Bush Administration constructed its economic policy on the basis of an ideology. This ideology came from the presidential administration of Ronald Reagan. It is founded upon the premise that it is always good to cut taxes. In the past, this premise was presented along with the idea that programs should be cut as well in order to maintain fiscal discipline and reduce the size of the government. However, this latter component fell to the wayside when the proponents of ‘small government’ found that it was not practical or feasible to cut programs from the budget. Thus, only the first part of the ideology remained. Cutting taxes is good!
‘Conservatives’ and the Bush Administration stuck to the ideology. It brought in people to work in the administration that were loyal to the ideology. And, they enacted their tax cut and everybody was happy…on the ‘conservative’ side of the aisle. Discipline was rampant, but the discipline was to enforce adherence to the ideology regardless of the consequences of the impact of its execution. Furthermore, we see this imposed discipline carrying through to the campaign to become the Republican nominee for President in the 2008 election. Candidates went through unbelievable loops to sound convincing that they would continue the Reagan policy of cutting taxes if they were elected President. All seemed intent on becoming the next Ronald Reagan and they fought over who was the most representative of the Reagan tradition.
The problem is that the times have changed. The fundamentals are different now than they were 15 years ago let alone 28 years ago. The United States is not in the position it once was and must respond to the new fundamentals. The market imposes discipline upon those that operate within the market system. There is now enough wealth and power held outside the United States so that the United States must respond to this discipline and impose the discipline upon itself. This is all a part of being just one among many. One must pay attention to the wishes and needs of others. Within such an environment one must conform to the rules and become a good citizen.
This insight applies more than just to the ‘most powerful nation in the world.’ It also applies to those who hold power locally or regionally. Yes, the United States has been arrogant in attempting to impose its will on the world, but others have also been arrogant in attempting to impose their will on their ‘limited’ worlds. The attempt to impose an ‘ideology’ on others and the discipline that is applied to establish or maintain an ‘ideology’ on others is doomed to failure over the longer run. The problem is that the attempt to enforce the ‘ideology’ in the short run can have many dire consequences. The ‘ideology’ of the Bush Administration was related to tax cuts. The ‘ideology’ of others relates to ‘political correctness.’ The ‘ideology’ of others relates to Islamic fundamentalism. And, we can go on, if needed, to identify many more ‘ideologies’ that are alive in the world today.
What I am more interested in is the discipline that is necessary to be aware of and respond to the ‘fundamentals’ that exist in the world. I am not a post modernist. I do not believe that any worldview works and it is just a matter of who is in power. In the case of the economic policy of the United States and the decline in the value of the dollar…markets do work, some better than others, but, they do work. As a consequence, people, governments, and other organizations must operate within the boundaries and limits of being in a world with other people, governments and other organizations. This takes discipline, but it is a discipline that responds to and operates within the ‘fundamentals’ of the world. Some things, some models, some worldviews do work better than others. We must discipline ourselves to achieve the goals and objectives that are dear to us but we must do this in concert with the way the world works.
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