Sunday, October 12, 2008

The Forest and the Trees

We are in deep trouble. We are piling debt on debt with nothing to indicate that our tax receipts are going to increase faster than our expenditures. If we tax more, we will stifle the economy and collect less tax revenue. The only hope to balance the ledger is to drastically reduce spending. This article explains why we won't reduce spending even though it is THE existential problem facing the USA.

The modern analytical mentality focuses on details. To understand a thing we must break it into component parts and see what each of them is made of. Then we think that we understand the whole. This is the idea that by understanding each tree in detail, we will understand the forest. The old adage the he can’t see the forest for the trees indicates that our focus on detail is a break from traditional wisdom. This is especially true in Washington DC where we not only focus on each individual tree, but each tree now has its own lawyer, lobbyist and pet Congressman.

Change comes to Washington in starts and fits. Usually change means new programs and bureaucracies, but at some rare moments in our recent history, a new administration looks to save money by eliminating unnecessary programs and agencies. This almost never works because in Washington change only happens in one direction and that is always towards MORE. A new agency with hundreds or thousands of employees can come together in a flash, but the machine has no gear that allows us to go backwards and eliminate senseless, redundant or counterproductive departments. All new Presidents aim to kill some programs and offices, but it never happens.

Why is it impossible to eliminate Bureaus, Agencies, Offices and Departments? The main reason is that the people who have the most interest in each bureaucracy’s survival are those with the most information about it. These are the bureaucrats that work in each office of the gigantic Federal colossus, the clients of each office and the lobbyists that represent the special interests that sell to the office or are served in some other way by each office. They have facts and figures, they have evaluations on people served, they have personal testimonies and they collate, prepare and update all of their information into rock-solid arguments that advocate continuity. The administrations that want to eliminate spending by amputating these cost centers enter into arguments in Congress that they can’t win. Each Congressman that is beholden to lobbyists that are patrons of a certain office will be supplied with the carefully prepared, heart-wrenching and logical reasons that the special work of this office must continue. This Congressman will then huddle together with other Congressmen and make the deals so each washes the other’s back. “You vote with me here and I’ll vote with you there”.

This is understood in Washington and crusades to eliminate Offices, Agencies, Bureaus and Departments are not even attempted any more because they are certain to achieve nothing. But we now face a crisis of proportions that requires real cost-cutting. We are deeply in debt as individuals, as a trading nation and as a government. If our present rate of increase in spending and our present slower rate of income growth continue, there is no way out of our problem. The ledger does not balance now and if we continue as is, it will get so bad as to create unpayable debt.

All of our economic growth over the last ten years was fueled by debt and artificial expansion of the money supply by the Federal Reserve Bank. The demographics of our country are changing; from this day forward for at least fifteen years, more taxpayers are going to retire than new taxpayers will come into the workforce. The interest on the Federal debt this year will total $451,154,049,950.63. That is 15.3% of the total FY 2008 Federal Budget as reported with questionable accuracy by the White House. The latest estimate of the Budget deficit in FY 2008 is $438,000,000,000. FY 2009 will see a larger deficit; in fact it will probably be much larger as tax revenues will go down as entitlements go up. The national debt is at $10,287,246,000,000 as I write, but it does not include about a trillion dollars that have been approved by Congress but have not yet been spent by the Treasury. Conservative estimates by David Walker, the ex Director of the General Accounting Office project our national debt at over 65 Trillion dollars given today’s income and expenses. The interest on that debt would be more than this year’s entire Federal budget. Federal government spending is clearly unsustainable.

The United States of America has run a trade deficit for the last 16 years. In 2006 the trade deficit was 753 billion dollars and in 2007 it was 700 billion according to the US Census Bureau. Other organizations have much higher estimates of our trade deficit. These continuous trade deficits mean that we are buying on credit as a nation. In order to finance our national spending spree, the Federal Reserve Bank has created trillions of dollars out of thin air, doubling the money supply in the last ten years. Now in just the last two months the Fed has added another ten or fifteen percent to the money supply. We are constantly told that the global economy benefits us all, but if we step back to look at the whole forest we see that the idea that “free trade” is good for America is laughable. If we don’t balance trade with our creditors, they will demand that we pay our bills in their currency and our standard of living will collapse.

The Federal budget and trade policies are clearly unsustainable. That is why the economy is crashing around us. Paulson and Bernanke focus on the details of sub-prime lending and debt equity swaps, they focus on freeing up credit, but the reality is that the entire system is destined to crash unless we manage to balance our accounts. More debt will not solve the problem of too much debt. We need to address the big picture. We need to focus on the forest and not the trees.
• We need to eliminate trade deficits and make them trade surpluses.
• We need to care for the dollar right now before it is rejected as a reserve currency around the world and that means that we need to stop printing and instead, shrink the money supply.
• We need to change budget deficits to budget surpluses and we need to start paying down the national debt.
• We need to stop cartels of giant corporations from using the government in such a way as to protect themselves with regulations and enrich themselves with government contracts. This is particularly true of the financial, health and insurance industries and the Military Industrial Complex.

If we don’t do these things we will implode. These four goals require that we stop looking at the individual trees. These goals require that we step back so that our vision encompasses the whole forest and then we need to act. We need to start knocking down trees without listening to each tree’s representatives.


In order to explain the idea I am going to use an example to show what happens broadly across the hundreds of governmental offices. An obvious example is the Bureau of Alcohol, Tobacco and Firearms. There is no need for this bureau. There are three or four others that perform Federal law enforcement and the BATF has a terrible record of ineptitude and heavy handedness. But it has not been disassembled and it won’t be disassembled. It will continue to consume about a billion dollars a year. Last year its budget was $ 1,013,980,000.

The ATF like all Departments, Offices, Bureaus and Agencies has dedicated itself over the years to a number of different tasks, but the first of those tasks is the creation and constant perfecting of its institutional raison d’ĂȘtre. If you listen to the minutiae of a ATF apologist he or she will rattle off prepared lists of seemingly logical and moving reasons why the Bureau is needed to maintain order and the American way. That discussion will be interminable and the people who have had the most time to hone every point of their argument are those who are personally interested in the continuity of the ATF. There were concerted efforts by the Bush administration to do away with the ATF when they had recently arrived in DC. They went before Congress and told them that the ATF was badly operated, redundant and unnecessary. What came of those efforts? Nothing. If you think that we’ll get rid of the ATF by focusing on details you are dreaming.

But the ATF is only 0.03% OF THE federal budget. What will really sink us is unsustainable government spending, special interest driven regulations, the criminal manipulation of the Federal Reserve Bank and Trade Policies that have beggared the nation and the middle class. We can see that these are the causes of our problems when we step back and look at the big picture, when we look at the whole forest.

So what do we see when we look at the whole forest? Here are a few views that are worth thinking about:

• Our military spends more than half of all military expenditures on earth. Our defense expenditure for FY 2009 will be over 600 Billion dollars. We have US military in 130 countries around the world. We defend countries that then loan us money to defend them. The size of our defense expenditure can only because it is expensive to “project power”. In English that means attack other countries. We have an offensive, not defensive military machine
• We are running a global empire. We are involved in every dispute around the world. We are actively engaged in two wars against countries that could never threaten the United States. We are clandestinely involved in at least two wars. We are reviled in the Middle East and now in Latin America where we are seen as a mindless bully. We are even threatening Russia now. Would we allow any other country to do what we do around the world? Does anyone really think that infuriating the rest of the world makes us safer?
• We also spend more on intelligence than the rest of the world put together. Our intelligence budget is larger than the military budget of any other country in the world. And the intelligence that reaches our decision makers is more frequently wrong than right. How can we justify 911 when we spend so much on intelligence? How can we justify Iraq or the fact that we can’t find Bin Laden? Don’t we have a right to know what we are paying for?
• Our health care cost 2.3 Billion dollars in 2007. That was 16.6% of our GDP and the costs are rapidly rising. That cost is 75% more than any other developed country and the rest of the developed countries insure everyone. 15% of our population has no medical insurance and another 35% has inadequate coverage. Our health statistics are among the worst in the developed world.
• Along the lines of the item above, given the current rates of increase in costs, Medicare Parts A and B and Medicaid will occupy over 50% of the Federal Budget in five to seven years. How Is Medicare Funded? Unlike Social Security, Medicare payroll taxes and premiums cover only 57% of current benefits. The remaining 43% is financed from general revenues. Because of rising health care costs, general revenues will have to pay for 62% of Medicare costs by 2030.
• Since entering into “free trade” trade agreements, American industry has gone overseas. We have lost five million industrial jobs over the last ten years and we have gained jobs in hospitality and health care. We were told that “free trade” would allow American manufacturers to sell overseas, but American manufacturers WENT overseas and they sell their stuff back into the USA. We have a 800 Billion dollar trade deficit and it is increasing.

We are on the road to ruin and none of the Republicans or the Democrats is willing to take their eyes off of the details and tackle the whole picture. We are not going to come out of this unsustainable dive until we all agree that the Federal government must cut the budget at least by the amount of the deficit, which is somewhere between 500 and 600 Billion dollars. That will only happen by amputating whole Departments (Commerce, Education, Interior and Energy), and by ending our self-appointed role as global bully.

If we don’t get our house in order soon, our economy will truly crash and given the incredible power of the modern President, martial law will be imposed. If we don’t change course and attack our existential problems head-on, unemployment will reach 25% and no one will receive their entitlements. The government will use their favorite all-purpose tool, the military, to impose order. We will lose all of our constitutionally guaranteed rights and we will live in a police state.

4 comments:

Adam said...

Betsy lerners "The Forest for the Trees" does just that. She indicates early on that this is not a book about style. She obviously believes, that in spite of technical faults, an author may still produce very good work.
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Adam

Internet marketing

saustrabeck said...

OUSTANDING, Chris!!!

Pete Murphy said...

Great post, Chris. However, I'd like to make a correction. You said, "The United States of America has run a trade deficit for the last 16 years." Actually, our last trade surplus was in 1975. We have run a trade deficit every year since. And the cumulative deficit since that time, expressed in current dollars, is $9.1 trillion.

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today's recession may be just a preview of what's to come.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China's. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface for free, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, "Five Short Blasts"

Chris Ferrell said...

Thanks for the great comment Pete. Your theory is new to me, but I've thought something along those lines for years. How could the Japanese and especially the Chinese and the Indians arrive at American levels of consumption? Where would they drive and park all of their cars? Where would they build all of their 2000 sq. ft. homes? There isn't enough space for all of the stuff that Americans consume. And if they did have the space for all that stuff, there aren't enough resources to make so much stuff and to fuel the stuff's operations.

I think that a basic component to "free trade" is that markets will find equilibrium. It is a basic rule of economics. Therefore if we do not protect our wages through tariffs or some other mechanism, in the modern world our wages will reach equilibrium with the wages of our competitors' wages minus the cost of transportation to ship their products to the principal market, which is us. How can it be a good policy for America to enter into a system that is certain to bring American wages to a par with Chinese and Indian wages?

I am interested to read your theory all the way through and will buy your book. Thanks again for the comment.