The United States seems to be enduring a prolonged Groundhog Day. No matter what happens, responses from the governing liberal establishment remain the same. At the prospect of freer elections in Egypt, the New York Times produces pages of anesthetizing treacle on the benignity of the Muslim Brotherhood. The same people who told us the Viet Cong were agrarian reformers in a civil war who made their own weapons, and that Ayatollah Ruhollah Khomeini was an idealist who would end the Shah’s police excesses and govern with the godly severity but honest scruple of Pius IX in the Papal States, tell us now that the assassins of Anwar Sadat are moderate reformers driven to occasional attacks of extremism by the oppressive provocations of our departed Egyptian ally.
Columnist Tom Friedman, in the same pages, briefly set aside his passionate concerns about global warming in the midst of this frigid winter, and the need to put a hand-held communication device in the fingers of everyone in the world above the age of three weeks, to complain about Israeli settlements. The ability of Mr. Friedman to continue to believe that Israeli settlements have anything to do with the attainment of a durable peace in the region is a triumph of superstitious self-brainwashing over mind, spirit, and flesh. If the Israelis designated everything built in the Jerusalem area since 1948 as a settlement and abandoned it to be turned into homes for retired unsuccessful suicide bombers, the Palestinians would fasten on some new complaint. There will be no peace until the Palestinian leadership believes that it has no chance, and will have none, to get any more territory than they can negotiate for now, and that their long-term best interests and those of the Arab powers who sponsor and promote their acts of terrorism and infiltration will be best served by composing differences with Israel and accepting the permanence of a Jewish state.
And in Washington, after a long drum roll, and intimations of pending mountain-moving in deficit reduction, the Obama administration gave birth to a deformed mouse of a budget. On the basis of wildly optimistic forecasts of revenues from new taxes and economic-growth rates, the deficit is supposed to shrink to $1.1 trillion, more than the entire (M1) money supply (currency plus short-term or easily liquefiable deposits) in the first year of the Obama administration. There is a good deal of pie-in-the-sky over $2 trillion in deficit reductions over the next ten years, again based on 4 percent annual economic-growth rates, euphoric revenue and spending assumptions, and 95 percent of it after next year’s elections, after which Mr. Obama will be looking forward to skipping down the well-trodden path of the ex-president to immense wealth in an undreamed-of pay grade.
The administration ignored its own deficit commission, ignored the rather unambiguous message in the shellacking of 66 House members and six senators and the cadres of state and local government in almost every state just three months ago, and proposes to skip the opportunity to tackle the approaching train wrecks of Medicare, Medicaid, and Social Security before the great Baby Boomer population bubble leaves employment for the golden years of the beneficiaries. At this point there arises the Punxsutawney Phil — the supreme groundhog — of modern American politics, William Jefferson Clinton, nonstop tutor in political survival techniques to the president, and also a former standard-bearer of the new Democratic politics. Just as Mr. Clinton — shellacked himself in 1994 by Newt Gingrich, Bob Dole, and their Contract with America — lured Mr. Gingrich into shutting down the government to try to enforce spending reductions, Mr. Obama has left it to the Republicans to tackle entitlements, as everyone with the benefit of a Grade Three education in arithmetic who examines the budget, however cursorily, can see must happen.
The Republicans have promised a serious alternative budget, and they apparently believe that the voters are ready for strong medicine. Clinton defeated Gingrich in the Nineties because he was running budget surpluses and his tax increases fell clear of most voters; Gingrich couldn’t sell the case for the urgency of spending reductions and looked abusive and irresponsible in shutting down the federal government. The Republican leaders in Congress now are much less easily attacked than Gingrich, who, as Senator Dole said at the time, “never lets anyone get between him and a camera.” The new Speaker of the House, John Boehner, is not someone the Democrats can invoke to frighten little children into eating their breakfast cereal, as they could with Gingrich. He does have the disturbing habit of bursting into tears (like the Iranian leader Mohammed Mossadegh, for the removal of whom in 1953 Mr. Obama has apologized to the Iranians on behalf of the Eisenhower administration). But this may not be nervosity on the part of the Speaker, but rather a rational response to insights into the close political future.
The government is simply not responding to the self-inflating debt bomb, and it is further hobbled by econometric anomalies. It is widely consented to that these colossal deficits do not immediately increase the money supply, but I think that they do. In three years, this administration will have increased the national debt by $4.5 trillion. Most of the recent borrowing has been from the Federal Reserve, and the official and received view is that this does not increase the money supply, because the government can pay down the Federal Reserve without the debt having got into the hands of the public. But the $4.5 trillion will have been spent, and put in the hands of the public, and I am afraid that for all purposes of ultimately tabulating inflation, those were infusions of money into the money supply. I do not believe a word of the arguments about collapsing the debt on a timely basis if inflation threatens, as a parent company eliminates debt owed to a subsidiary by consolidating the subsidiary. That is a shell game and it won’t work.
There are also anomalies in the calculation of velocity of money, as opposed to per capita national income. Velocity of money is when transactions or other money transfers occur without any real generation of increased collective wealth, because no value is added or created, and it is visible when the GDP rises as a multiple of the money supply — i.e., the money supply does not increase but the gross commercial activity does. The example I use is that if it were enforceably decreed that every adult in Paraguay were obliged to write a poem and sell it and buy another, ten times each day for a year, with every sale of the poem for $100, Paraguay would have the highest standard of living in the world (GDP divided by the population), but no one would be a cent wealthier. There is some of that in the U.S. now, with $4.5 trillion spent annually in legal, consulting, and financial-transaction fees (“God’s work,” as the chairman of Goldman Sachs disinterestedly calls it), and $2.4 trillion in medical costs. Very little of it is really value added as primary (extraction of resources) and secondary (manufacturing) industry revenues are. It is essentially a taxation of more productive activity, though large sections of it, such as most academic work and R&D, do produce invaluable, if unquantifiable, added value, and much of the less productive work is still essential.
That is why the United States does not have a dramatically higher standard of living than Germany and the Netherlands, where a much smaller percentage of the population works, there is little job creation, and more than half the population receives government benefits. American lawyers and stockbrokers work hard, but they are just as much a charge on productive work as German welfare cases are. Federal Reserve chairman Ben Bernanke is doubtless correct that it will take at least five years to reduce unemployment appreciably, because it will take at least that long for the U.S. to be weaned partially away from the chimera of the service economy. A silly budget like this week’s will not be a winner politically, even allowing for the talent of the Republicans at self-inflicted wounds, and it just delays and makes steadily harder and more costly the task of getting to grips with the problems this president was elected to solve.