I am a rather positive person, and dislike being a prophet of doom — and particularly dislike being the pub bore about it. But the state of the world economy hasn’t left me any alternative. In particular, anyone who reads these columns will have encountered my periodic fire bells in the night about the U.S. current account and budgetary deficits, which have pealed more loudly as catastrophe determinedly approached.
I started foaming at the mouth about $800-billion U.S. current account deficits more than 10 years ago, and about the companion issue of energy imports. The petroleum-exporting countries have kept America as a gigantic fish on a steel line for nearly 50 years, reeling it in slowly, and letting it out (relaxing oil prices), when the United States made purposeful noises about raising domestic production, cutting consumption, and going to alternate sources. As soon as OPEC fine-tuned the fishing reel, the great fish went with the docility of the addicted consumer back to its default position mainlining on foreign oil at steadily increasing prices and in ever larger quantities. Every president starting with Richard Nixon warned of the danger in this addiction, but none has done anything useful about it. There must be an emphasis on cheap and plentiful natural gas, more nuclear (with maximum safety standards), more off-shore drilling (with maximum environmental-protection arrangements), and higher gasoline taxes to raise revenues and restrain use. All of this will bring down the international price and reduce the amount of money available for the Iranians, Saudis, Venezuelans, and others to finance terrorism around the world, and will ultimately reduce U.S. defense costs. None of this has been done, though the need for it has been obvious for decades.
For over 10 years, the Clinton and George W. Bush administrations kept interest rates low and mandated incitements to home building. Savings were discouraged, consumer spending was encouraged, and the Japanese and German automobile industries and French and Italian luxury foods industries, as well as Canadian raw materials, fed and were sustained by American consumption, increasingly paid for by American private sector borrowing. The resulting housing bubble, with the trillions of dollars of worthless debt associated with it, almost capsized the world economic system and reduced the entire banking system of most countries (but not Canada), to a ragged, shivering, Oliver Twist holding out a begging bowl to empty-pocketed national treasurers.
Scores of millions of lower-paid manufacturing jobs were outsourced to cheap-labour countries, while perhaps 20 million unskilled workers were allowed into the country illegally, not to build the alarm clocks and steam irons that now came from China, but to pick lettuce and shine shoes and roll the tennis courts of the Hollywood limousine left (below the minimum wage, of course). America’s skyscrapers became jammed with denizens of the service sector. Most of these people offered no value added to the economy, even if they generally were well-trained and hard working. The U.S. economy in 2008 had reached $1-trillion in legal fees, $1-trillion in consulting fees, and over $2-trillion in financial transactional and facilitation fees. The United States, like the West generally, is paying a heavy price for having too many people who don’t actually produce added value. All these activities are effectively taxations on wealth production.
American health care, the best in the world for three quarters of the population, costs $4,000 per capita more than in other advanced, prosperous democracies (all of which, unlike the United States, extend full coverage to the whole population). The American problem has been that 70% of the people had splendid health care plans that were entirely paid for by their employers, and were not considered taxable benefits. Most of the rest of the population fell into the government plans for people of reduced means, or the basic service for the indigent. Any reform would require more free service from doctors and paramedics, lower costs from the pharmaceutical companies, a cap on malpractice awards to reduce legal costs, and full competition in the health-insurance business. The Obama health care reform did not help the country’s problems, but aggravated them.
The president’s emphasis on increasing tax rates is dogmatically generated, and his refusal to make any serious suggestions about deficit reduction, after keeping expectations aloft for two years with the Simpson-Bowles debt commission (which was thoughtful but has been ignored) are self-inflicted wounds to economic revival. U.S. Economic growth, on the latest numbers, has effectively stopped. There is no net job creation, and unemployment and chronic under-employment now chillingly revive thoughts of Franklin D. Roosevelt’s concerns for “one third of a nation,” though the safety net is much more generous now. There is nothing left in the well to prime the Keynesian pump with; increased taxes on incomes would be a catastrophe at this vulnerable stage in the economic cycle; and spending cuts alone, if there were any will for them, would be a palliative only.
As I have been writing here and elsewhere ad nauseam, the U.S. government should have cut income taxes to stimulate growth, raised consumption and transaction taxes to cut the budgetary and current account deficits, and reverted to New Deal or Eisenhower highway projects to reduce unemployment while rebuilding the decrepit infrastructure of America. There is no prospect of any of this either, just the approaching tornado of stagflation.
Next week, unless there is an overwhelming event that intrudes, I will discuss the U.S. presidential candidates, and the state of other countries, including Canada.
National Post
cbletters@gmail.com
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