Lessons of the debt deal -- politics in the age of American decline

Today’s blog also appeared in Minnpost on August 5, 2011.

Lessons of the debt deal -- politics in the age of American decline

By David Schultz | Friday, Aug. 5, 2011

The deal to raise the debt ceiling damaged the United States in many ways. It did little to address the long-term economic problems of the country while exposing the fragility of American political institutions and the factional nature of this country's political system. It reveals the politics of America in the age of decline.

Time magazine founder Henry Luce once declared post World War II dominance of the United States the American Century. America's economic dominance financed its political and military supremacy, giving it the leverage to affect world politics. Too often pundits declared the American Century over, yet these proclamations seemed premature. The American supremacy that historian Francis Fukuyma proclaimed with the fall of the Berlin Wall in 1989 was supposed to reveal an America as the sole economic and political superpower in the world. That did not happen. Now whatever one can say about the debt agreement, it did little to reverse the threats to American dominance.

The debt deal needed to confront two issues: the debt financing the empire in the past, and the debt financing its future. Paying an increasing percentage of the federal budget to debt management is bad accounting. Yet the agreement really did little to confront either. The debt ceiling was raised — partially averting one problem — but the real choices about how to finance long term spending commitments were ignored. Creating a super committee pledged to find $2 trillion plus in savings merely postponed the tough choices for the future. As such, the agreement was more symbolic than substantive.

Four broad issues challenge U.S. financial future

Yet long-term spending and its economic impact are not the only issues that need to be addressed. Collectively, four broader forces challenge America's financial future, hampering its leadership role in the world.

• The first is the declining economic performance of the country, both short and long term. Short term, the economy is headed to a double-dip recession, simultaneously decreasing tax revenues and increasing demand for government services. Longer term, America needs to reinvest in its infrastructure, schools and workers, modernize its technology, and transition to new energy sources. The debt agreement makes it difficult for the United States by choking off investments required for any of these. Lacking investments in the economy, it will never grow fast enough to generate the tax revenues necessary for the American empire.

• Second, demographics will continue to challenge the United States as its population ages, demanding more health-care expenditures and retirement benefits at a time when the number of workers to sustain their parents decreases rapidly. Health-care reform in 2010 did little to address cost containment, and there is no indication that the debt-reduction super committee will tackle these problems in the coming months, especially as the 2012 elections approach.

• Third, the current tax system is unsustainable. It is inefficient, failing to support economic growth and job production. It is also inequitable, pushing less of a demand on corporations and the wealthy to pay their share. All this was predictable. Nine months ago Obama caved into an extension of the Bush-era tax cuts. Now to pay for them, the poor and middle class must sacrifice. Merely repealing the Bush-era tax cuts would get the United States a long way toward dealing with its longer term debt. Better yet, return the corporate tax rates to what they were in the 1960s, a time when U.S. corporations were their most profitable, and lift the income cap of Social Security taxes, and most of the longer-term debt problems disappear. Instead, the opposite is occurring — the American empire is a corporate one financed more and more by cuts to the poor and middle class.

• Fourth, much of the recent debt is the cost to pay for military excursions abroad in places such as Afghanistan and Iraq. America continues to spend unsustainable amounts to fund its military and foreign-policy objectives. The debt deal did nothing to rethink these priorities and instead threatens military spending as an incentive to make cuts elsewhere.

Fewer resources for U.S. priorities in the world

The debt deal thus does little to generate for the United States the resources it needs to maintain its economic and military position in the world. It is vastly overcommitted already, unable to sustain its current objectives let alone take on new ones in the world. For the future the United States will have fewer resources to pressure for human rights in Syria and Iran, to confront global terrorism, and to economically compete in a world becoming better educated and more productive than America.

The debt-management deal could have addressed the problems facing America but did not. It failed because of a collapse of domestic politics. The American Century was held together by a bipartisan consensus sustained by economic growth. Take away that growth and the consensus disappears. Thus, the factional politics and serious dissensus between President Obama and the Republicans in Congress over the debt ceiling and reduction was so intense because of a basic dispute over how to finance American commitments in an era of declining resources. Lacking economic growth, politics has become a zero-sum game, with clear winners and losers. Here, the debt deal revealed little in terms of a victory to reverse the decline, thereby suggesting an intensity of politics for the foreseeable future.

Controlling Gas Prices and Other Economic Heresies

Economics the topic this week, tackling four issues that ought to be on everyone’s mind. It is a plea to political leaders to have the courage to speak the truth and for citizens to be willing to listen to it.

Gas Prices
$3.50 a gallon for gas! This is some jump in present gas prices based on speculation about the future of Libya and other Middle East oil producing countries. Increased gas costs can justifiably be based on objective factors such as decreased supply, increased demand, exploration and costs in a post-peak world. But surely there is no basis for jacking up the price at the pump premised upon subjective speculative factors? Or is there?

At the root of this debate is a clash between rival economic theories. Current economic orthodoxy is that gas stations, distributors, and oil companies are economically justified to raise prices on current gas and oil based upon speculation by traders about future gas and oil because it necessary for “cost recovery.” As the argument goes, if today the price of a barrel of oil goes up by 10% is it ok to raise the price at the gas pump or at the distribution point equally by 10% or more in order to recover future anticipated costs. This is an interesting theory but it fails to make sense.

Think about an alternative economic theory that is more realistic. Let us say that on February 27, 2011 gas is selling at the pump for $349.9 per gallon. Assume also that the price of crude oil on the commodities market goes up by 10% that day. Should dealers and distributors be permitted to raise gas prices by 10% or more on the gas they already own and have purchased? No. The gas they have in their possession was purchased in the past at a different price P1. The gas sold on February 27, 2011 (T1) should be based on price P1. It is P1–gas purchased in the past but now presently in the distributors’ or stations’ tanks–plus a reasonable profit that should determine the price of gas at T1. It should not matter what speculation is taking place on the commodity markets regarding future gas prices.

Another way of making this argument is to say that if crude oil gas prices are rising, they should not affect current gas prices. Sellers of gas can recover costs on the new price P2, at some future time T2. To allow for “cost recovery”–raising of gas prices on current gas already purchased based upon future speculation really amounts to what used to be called profiteering or price gouging. Moreover, to allow for speculation on future prices of gas to affect the price of current gas already purchased by stations or distributors only helps to encourage gas speculation and price volatility.

We saw a few years ago how crude oil speculation drove gas to $4 gallon plus. There was no decrease in production and proof that it was gouging was that the major oil companies had record profits. The same is already occurring again.

There ought to be a law that prevents the raising of gas or energy prices on current supplies based upon future speculation. Let new supplies, which reflect the new crude oil prices, reflect the new price. This is a better free market theory that does not encourage speculation.

Wisconsin Budget Crisis
Governor Walker contends he needs to strip collective bargaining rights from public employees in order to address the state’s structural deficit. He cites public employee health care and pension costs as the problem. There are several reasons his theory is wrong.

First, even if he is correct, the public employees’ unions have already indicated their willingness to negotiate on these points. That should settle the issue about the need to strip away rights.

Second, Walker is not correct in his linkage, at least to the extent that he asserts. Wisconsin’s deficit, much like many other states, is driven by several factors. 1. There is the recession driving down tax revenues at the same time demand for government services are increasing. 2. Overall health care costs are rising in America in the public and private sectors. Obama’s health care law was originally supposed to address this issue but there really is very little in the 2010 Patient Protection and Affordability Act that does that. Thus, the health cost issue is a more pandemic issue not confined to public employees, unions, and Wisconsin. Blame a mediocre federal health care bill for that issue. 3. Many states have failed to raise taxes for years and in the case of Wisconsin, a tax cut was pushed through. Combine a tax cut with rising health care costs with a recession and a demand for government services and what do you get? You get a state deficit. These are not factors driven but public employees’ collective bargaining rights.

Finally, it should be pointed out that the pension and health care benefits were freely negotiated in the past. Cutting both only leaves these individuals and their families economically worse off in the future. They were promised these benefits as a result of a fair bargain. Stripping away collective bargaining rights is like taking your bat and ball home because you do not like the way the other side is playing the game.

Fixing Social Security
Obama’s budget is a failure and the GOP response is just as bad. Both sides fail to address the real needs to tackle Social Security, Medicare, Medicaid, and the horrible tax structure we have. Throw Michelle Bachmann and the Tea Party in with that too. All of them are dishonest about the budget.

Social Security is easy to fix with two changes. The first is gradually raise the eligibility age to 67 over the next five years to a decade. Second, Social Security taxes are currently capped at approximately $106,000. This means that if you make more than this amount any income above this is not taxed. A simple answer is lift the cap. Turn the current regressive Social Security tax from a regressive to a progressive one. Lifting the cap and raising the age easily solve the Social Security problem for the future.

Fixing Health Care to Cut Costs and Improve Public Health
The 2010 Patient Protection and Affordability Act was a positive social good but a missed opportunity. The good was in extending health insurance to 36 million or more Americans. The missed opportunity was its failure to go far enough to address public health care needs and reduce costs.

According to a CDC or NIH study (I cannot remember which), about ten percent of American’s society’s health is driven by lack of access to health care. Approximately 30% is due to genetic factors, 20% environmental, and another 40% percent by preventable life style choices. Genetic is self-explanatory. Environmental refers to pollution in the air and water and to public safety issues such as guns and crime. But the last category, life-style choices, refers to the fact we eat too much, drink too much, eat the wrong foods, and fail to exercise. All of us have seen the stories about chronic obesity in our society and it, along with American waistlines, are growing every day.

A broader health care plan in the United States need to address the life-style choices. However, as soon as this is talked about one sees annoying commercials sponsored by groups that represent unfoods on TV complaining that this is social engineering or an effort to tell Americans what to eat and drink. Is that not the kettle calling the pot black. This is exactly what they have been doing for years in their ads and now they object to some efforts to counteract their ads.

A good health care (and effectively a good economic) measure needs to address these personal choices.

Finally, there is also the problem of end of life care. We consume the majority of our health care expenditures in the last six months of our life. I am not raising the Sarah Palin ill-informed death panel issue, but clearly we need to address end of life health care. I do not know the solution but we need a more rational solution.