Times That Try Men’s Souls

http://www.danielrose.org/texts.htm

Bard College
Hannah Arendt Center
October 28, 2011
Times That Try Men’s Souls
by Daniel Rose
The failure of America’s political leaders across the spectrum to
explain to the public the serious long term, intermediate term
and short term challenges we face has caused us unnecessary
pain, turmoil and widespread loss of public confidence in
government. Their failure to deal effectively with those
challenges has put our national well-being in jeopardy.
Widespread protests from left and right may lack a coherent
agenda, but the public knows that something is wrong; and they
demand to hear the truth.
Liberals refuse to acknowledge that we must live within our
means; conservatives refuse to acknowledge the economic and
social imbalances that threaten to strangle our society. Both
confuse symptoms with causes and the cyclical with the
structural; both use the current turmoil to further their
ideological goals. As a result, both give the impression of
being long on cleverness and short on integrity. Neither faces
the long term ramifications of an economy shifting from
industrial production to services and information, or the
emergence of a single global market for goods, labor and
capital, or growing inter-generational economic tensions.
Neither encourages the deferred gratification and future2
mindedness that underlie all successful societies.
America’s declining rate of social mobility, our diminishing
ability to influence the world beyond our borders, the relative
shabbiness of our national physical facilities, the deteriorating
quality of life—none is pre-ordained, none is inevitable. All are
the result of bad governmental decisions and a public
demanding much but willing to pay for little—“self-inflicted
wounds” that can be reversed.
When we eventually deal effectively with the problems of
education, infrastructure, foreign trade, industrial policy and
social mobility, we will regain the forward momentum we had
before this “lost decade,” and our government will regain the
public trust it has lost.
Subtle changes in the American psyche, influenced by European
thinking, have caused our public to focus on “today” vs.
“tomorrow,” on “rights” vs. “obligations,” on “entitlements” vs.
their financing. All spell trouble, as does the Left’s demand for
“equality of result” rather than “equality of opportunity” or the
Right’s belief in “everyone for himself and the Devil take the
hindmost.”
Our common goals—a fair and just society, with opportunities
for advancement for talent and effort, with an appropriate
balance between public and private amenities, with the rewards
and obligations of citizenship rationally apportioned—are
achievable over time; but current realities are discouraging, and
public expectations are unrealistic.
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Aristotle might cite the “efficient cause” of our current
predicament as our dysfunctional mechanics of government—
electoral gerrymandering, arm-twisting political lobbyists, the
legalized bribery we call “campaign contributions.” The
“formal cause” he might cite as the preposterous cost of political
campaigning. Until we address these causes, we are unlikely to
get the kind of responsible legislative bodies—and responsible
legislation—our Founding Fathers envisioned.
The coming American “new normal,” a society stratified along
educational lines, with growing numbers of the under-educated
having no economically-productive role, is rapidly becoming a
fact of life. The wage premium of intellectual over manual
labor continues to surge, even as recent college graduates find
jobs scarce. How we increase the size of our national economic
pie and how we divide it appropriately are challenges we must
face—the sooner the better.
We have seen middle class wages stagnate so that workers can
no longer afford the goods and services whose purchase the
economy requires to keep growing. The top one per cent of our
public receives one quarter of our national income, the top five
per cent receive 37%; and 95% of the public must limit their
expenditures. The last time we had similar numbers was in
1928.
The national macro-numbers today are frightening. With a GDP
of $15 trillion, U.S. public debt to others is now $10 trillion and
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intergovernmental debt is over $4 ½ trillion, with the total
growing at the rate of $1.5 trillion a year. The present value of
our existing unfunded domestic entitlements is huge; common
estimates put them at $66 trillion: $35 trillion for Medicaid, $23
trillion for Medicare and $8 trillion for Social Security. Of 51
million private homes with mortgages, 15 million are worth less
than their debt. Three million homes were foreclosed last year;
another six million are in arrears. Our national unemployment
rate is over 9%, and millions of workers have given up looking
for work. The unemployment benefits of some 4 million may
expire this year. Student loans now total over a trillion dollars,
and the rising default numbers are ominous. Opinion polls
universally show a public anxious and pessimistic, pleading for
government’s pragmatic compromise on vital issues.
We must consider—calmly and rationally—where our economy
is and where it is heading. We can no longer afford the luxury
of allowing political polemic to drive reasoned argument from
the stage, nor permit political candidates to see no further than
the next election.
Just as our political parties cooperated in the national interest
during the crises of WWI and WWII, they must cooperate in the
current economic crisis. “Loyal opposition” is one thing; “rule
or ruin” political maneuvering is another, and the climate in
polarized Washington today is rightly called “obsessive
obstructionism.”
In light of the international embarrassment of Standard and
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Poor’s credit downgrade, history will deal harshly with our
Congressional leaders, and those like Grover Norquist, leader of
the “No Tax Increase—of any kind, at any time, for any reason”
movement and his efforts to demand No Tax pledges from all
Republican candidates (with the threat of running further-to-theright
primary opponents against them).
The left must face the ramifications of an aging and longerliving
population, of a public education system falling seriously
behind global standards, of government employee benefits out
of sync with those of the rest of society.
Grover Norquist may wish government reduced to “the size
where I can drag it into the bathroom and drown it in the bathtub
(sic),” but most of us do not. We want government services and
we must pay for them by taxation. Edmund Burke, the father of
modern conservatism, put it succinctly—“To tax and to please is
not given to men.” Europe has found that Value Added Taxes,
although regressive, are the least objectionable way to raise
revenue. If we cannot face other forms of taxation, we, too,
must consider them. (A 5% VAT would raise some $500 billion
in annual revenue.) One way or another, cutting expenditures
and increasing revenues lie ahead of us.
Few observers would disagree that free market economies are
more productive than rigidly controlled ones—leading to what
Winston Churchill called “the unequal sharing of blessings vs.
the equal sharing of miseries.” Few would disagree that to
achieve optimum productivity and socio-economic stability, free
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market economies require some degree of government
regulation. What that degree should be is “the question.”
John Maynard Keynes’ “interventionist” followers and
Frederick von Hayek’s “hands off” supporters will always
battle, but neither Keynes nor Hayek approved of swollen
government, and both agreed that over-indebtedness leads to
financial nightmares. Short term “stimulus,” (preferably on
desirable repairs to our deteriorating and inadequate
infrastructure) to provide immediate employment, and longer
term “austerity” (with renewed savings and investment for
continuous growth) reflect the best thinking of both. The two
trillion dollars respected engineers tell us we must spend on
infrastructure—for repairs, upgrades and expansions—will
provide short term jobs and long term economic and social
benefits. Had we created an infrastructure bank (with an
accelerated review process) three years ago, the results would
already be apparent. Short term fears of deflation, long term
fears of inflation and recurring fears of stagflation must be dealt
with realistically and prudently.
A healthy economy requires a sensible balance between
consumption and saving/investment. In America today
consumption is tilted in favor of private consumer goods and
against public goods such as airports, parks, highways, mass
transit, etc. We mistakenly consider expenditure on education
and scientific research as personal consumption rather than as
national investment for the future. We are heavily over-invested
in housing, which is not productive of future wealth. (Other
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countries do not share our fetish of home ownership nor our
“conventional wisdom” that house prices must rise more than
inflation.)
Our financial services industry, whose function should be to “oil
the wheels” of society and to channel savings into productive
enterprise, has become a world of its own, skimming a
disproportionate share of the national income. In 2008, for
example, the country’s top 25 hedge fund managers personally
received $25 billion among them, largely through the legal
scam of low tax “carried interest”; and corporate CEO’s receive
huge bonuses even as their companies post major losses.
Rewards for risks on the upside have not been balanced by
penalties for bad guesses on the downside. No wonder our “best
and brightest” are seduced by financial paper-shuffling rather
than careers in the productive world. Eventually, even the
investment world will realize that a smaller share of a growing
economy is better for them than a larger share of a stagnant one.
National wealth cannot be distributed (or redistributed) until it is
produced; we must focus as much on wealth production as on its
division. Albert Einstein noted that, “In the real world, there
are neither rewards nor punishments—only consequences.” We
must act so that the consequences of our actions take us where
we want to go.
Our economic problems are remediable—but not in the
immediate future. America is a resilient society and we will
muddle through, but we must modify our expectations for the
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short run and again think long run. As Adam Smith wrote,
“There is a lot of ruin in a country,” and we have great
strengths. To regain our national momentum—to refute those
who speak of “American decline”—we must act vigorously and
wisely. Three specific areas cry out for governmental attention:
infrastructure, foreign trade and industrial policy. Our “public
intellectuals” are remiss in not demanding that we address them.
Finally, and most importantly, we must address the long term
challenge of providing productive employment for all those
ready, able and willing to work. Today, one quarter of our
young people drop out of high school before graduation, and we
have no economic role for them. Those with college degrees do
somewhat better—but not really well—graduate degrees or
specialized skills are increasingly required for success in this
information-fueled, high-tech world. Our workers are in
competition with those of the rest of the world who are
becoming better educated and vocationally-trained than U.S.
workers. We either raise our educational and skill levels in
STEM fields (Science, Technology, Engineering, Mathematics)
or suffer accordingly. Increasing poverty, downward mobility
and social turmoil are not impossible.
That is a “worst case.” A “best case” could occur if our
disadvantaged poor—whether whites in the “hollows” of the
rural South or minorities in the inner cities—develop the
attributes demanded by a high tech, globalized, competitive
world. Future-mindedness, self-discipline, the capacity for
sustained hard work and a passion for education are the
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underpinnings of the self-confidence and high aspirations that
lead to economic productivity and personal fulfillment.
Skin color, religion and ethnicity are fading rapidly as major
factors in American life. Social culture—as reflected in
attitudes, values and mindset—is paramount today, regardless of
the fulminations of demagogues. Entrepreneurship, for example
(which we need to encourage), requires a mindset of risk-taking,
thinking “outside the box,” the ability to rebound from failure
with renewed vigor, and the tenacity to hold fast to a creative
vision, all of which are cultural, not ethnic. Jesse Jackson’s
“perpetual victim” view of life should give way to W.E.B.
DuBois’ call for the minority Talented Tenth to lead the way to
the promised land.
Continuing economic growth is the answer to our employment
problem, but such growth requires a revival of what Keynes
called our “animal spirits,” based on confidence in prospects for
the future. That confidence must be based on real world factors,
and only political and legislative leadership can create those
factors: improved education and vocational training, improved
infrastructure, more astute foreign trade policy, a rethought
national industrial policy and a more balanced national
distribution of income and wealth.
Lowering the cost of political campaigning (by some form of
public financing, or free access to TV) and tightening—not
loosening—the regulation of political contributions (thereby
lessening the influence of lobbyists), are important first steps,
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along with an end to political gerrymandering. Undue
influence—whether of “fat cats” like the Koch brothers or the
Forbeses or of labor leaders like Randy Weingarten—must be
lessened. Political term limits and specific steps to increase
transparency and accountability to voters should follow. In the
meantime, we need more politicians like Teddy Roosevelt, of
whom the “bosses” complained, “We bought him but he didn’t
stay bought!”
“Let no good crisis go to waste” is a useful thought; but we must
be sure that Schumpeter’s “creative destruction” is indeed
“creative.” It will be worth our present pain and sacrifice if a
healthier, more responsive political and legislative system
results from it.
This past decade has been a difficult one for us, but we can snap
back. “American exceptionalism,” in which I believe, has
traditionally been based on underlying premises of “can do”
pragmatism, fair-mindedness, generosity and optimism. We
must not forget that.
Sheer demographics and economic projections indicate that with
a global population of 7 billion people, America’s position in the
world must in time change relatively. In absolute terms, great
days can still lie ahead for our country.
The following points would speed our recovery:
Budget deficits should be recognized as short term
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expedients to “tide us over” cyclical downturns, and our
debts must be paid down significantly as soon as budget
surpluses from a growing economy permit.
Health care costs must be financed by actuarially-sound
measures that are transparent and understood by all. In
2010 the U.S. spent 17.6% of its GDP on healthcare vs.
an average of 9% for European countries, yet their life
expectancies are higher than ours. We need better value
for our health dollars. “Defined benefits” as a concept
should yield to some form of a “defined contribution”
approach because we can no longer afford the former
today, much less when the WWII baby boomers retire.
Our system of taxation must be considered afresh, to
promote investment and to raise future revenue.
Eliminating many deductions and credits (e.g. from
eliminating $150 billion a year to stimulate race horse
breeding, whale hunting, etc., to rethinking deductibility
of interest on home mortgages) in favor of lower
marginal tax rates will provide a simpler and more
efficient system. The byzantine U.S. Tax Code,
thousands of pages written in technical jargon beyond
the ken of a typical small businessman without
expensive lawyers and accountants, is a national
embarrassment without parallel in the developed world.
Lower taxes on U.S. corporations’ foreign earnings
would encourage them to repatriate the cash (tax
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revenues for us, domestic investment money for them).
Tax havens (such as the Cayman Islands or the Faroes),
that serve no role other than tax evasion and moneylaundering,
should be subject to public scrutiny and
international regulation.
Legislation which protects the banking system by
distinguishing “depository” (savings/lending) banks
from riskier “investment” banks (that trade for their own
account) should be reinstituted, as advocated by the wise
Paul Volcker. And the capital requirements of all banks
(large and small, savings or investment) should be
examined carefully. Protection of savers and investors
and encouragement of lending are the goals. Private
entities “too big to fail” are too big.
Unfunded, unaffordable pension programs of federal,
state and municipal employees should be re-examined
and discussed publicly. Logic calls for them to be
brought into line with those in the private sector,
regardless of the short term political battles that will
cause.
Legal tort reform, regulatory reform and entitlement
reform should be reviewed periodically for costs and
benefits, goals and actual effects. There should be “full
and frank discussions” before an informed public on
these sensitive issues. Frivolous law suits should be
discouraged by using the British practice of having
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losers pay court costs and legal fees.
Foreign trade should be encouraged, not discouraged,
with the informed cooperation of business, labor and
government, all concerned with the national interest. A
clearly-enunciated “national trade policy” is long
overdue. We must again become a successful trading
nation, with high-wage, high-productivity jobs located in
the United States profitably providing goods and
services for the growing middle classes of the BRICs
(Brazil, Russia, India, China). Trade policy should be
all-encompassing; for example, tariffs on industrial
production “inputs” should be eliminated so that U.S.
producers are more competitive in the global economy.
Charges of growth-strangling costs of counter-productive
federal regulations (especially on small business) must
be investigated and, where justified, modified.
Sarbanes-Oxley and Dodd-Frank legislation should be
treated as “living documents” whose consequences and
unintended consequences are reviewed periodically.
Necessary environmental controls (which some business
groups fight even in good times) must be differentiated
from excessive controls (which ideologues support
regardless of cost vs. benefits).
Our housing problem must be faced realistically.
Americans have lost $7 trillion in home equity, and
necessary “de-leveraging” will be slow and painful. It
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requires orderly debt restructuring, debt reduction and
conversion of debt into equity, until normal market
forces again bring equilibrium. Permitting foreclosed
home owners to remain in residence as tenants, with
modest rents and an option to repurchase, will prevent
vandalism to the house and homelessness to the
occupant. (The mortgagee will receive some income and
some “shared appreciation” on the property’s eventual
sale but would face some write down in the short run.)
Enabling non-profit groups to own—and to rent out—
foreclosed single family homes is another approach; and
private investors can be encouraged to buy and rent out
distressed single family houses. With housing
production less than family formation, markets will
stabilize in time, but in the meantime, first-time home
buyers should be helped to absorb the current surplus of
available houses; and existing home owners should be
able to avail themselves of current low interest rates.
Those fortunate countries without a “sub prime” problem
either have required a significant down payment on
home mortgages and borrower incomes sufficient to pay
debt service (e.g. Canada), or have not let mortgage
originators bundle and sell loans (e.g. Denmark). For us,
someday; but not yet.
Visas and “green cards” for post-graduate students, high
tech practitioners and others who help our economy
should be expedited, not only for their benefit but for
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ours. A remarkably high percentage of our innovative
practices have come from immigrants or their children
who have started 40% of our Fortune 500 corporations.
“Prevailing wage” laws have had a distorting impact on
employment. General Motors, for example, has been
able to hire thousands of workers recently when unions
agreed to permit some “below-prevailing wages.”
Legitimate charitable contributions should be
encouraged, not discouraged. The suggestion that they
be taxed is the most counter-productive idea recently
proposed, since a thriving philanthropic sector is now
more important than ever. $300 billion in annual
contributions employing 9% of the U.S. work force
should not be diminished.
The multi-trillion dollar long term reductions in
government expenditures being proposed are necessary,
but some proposed cuts (such as Pell scholarship grants)
are ill-advised, and our public universities must be
maintained.
The successful industrial policies of Germany, whose
high-wage manufacturing sector is flourishing, should be
an example for America. The manufacturing economic
“multiplier effect” is much greater than that of the
service sector.
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Other questions to be pondered:
• Why should “second home” owners receive interest
deductions on their mortgages?
• What inheritance should heirs receive free of all taxes,
and what should graduated taxes be on larger estates?
• Should seniors, regardless of their ability to pay, receive
medications free?
• Should Social Security be “means tested?”
• How should Internet purchases and services be taxed?
• Is it psychologically sound for one half the public to pay
no federal income taxes at all?
• Why should tax rates on short term capital gains (less
than one year) not be raised, while those on longer term
(over a year) not be lowered? And how about a zero tax
rate on newly-issued securities which fund growth?
• How should “short selling” be regulated, taxed and
reported, and what are appropriate regulations and
taxation for the $600 trillion “derivative” market. (Yes,
the $600 trillion figure is “notional,” with much doublecounting,
but what a number!)
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• Given our conflicting desires for “energy independence”
and for a “green world,” how should oil and gas
companies be taxed? And would not higher taxes at the
gas pump curtail consumption as well as provide
revenues?
America’s great days may still lie ahead, and some believe it to
be inevitable. “The mode by which the inevitable comes to pass
is called ′effort,′” said Oliver Wendell Holmes, and it remains to
be seen if the American public will make the effort.
(Daniel Rose’s talks may be found on www.danielrose.org)