Our Failed National Economy (Let's face it, Our growth the past decades was built on an illusion)

Tuesday night's election result was a victory for deep partisan stalemate, polarization, dysfunction, and acrimony throughout the halls of government. The market badly wanted a Republican victory, and sometimes you get what you wish for. Unfortunately, Mr. Market’s innocent dreams of a more “business friendly” government will turn out to be a nightmare of fiscal profligacy on a scale that's virtually unprecedented in modern history.

It's now guaranteed that the hapless soul who succeeds to the White House in January 2013 will preside over a nation with $15 trillion of reported public debt, that is, debt at 100% of GDP and counting. On top of that will be tens of trillions more in unfunded (and unreported) entitlement liabilities -- the financial burden of which will only intensify as the baby boomers become fully retired. Worse still, Obama’s successor will have no way to stop the headlong rush into national bankruptcy he or she will inherit from this week's earthquake because the specious ideological shibboleths of both parties will have poisoned the only policy tools -- tax increases and entitlement cuts -- that can make a difference.

To see why this scenario will play out, start with the bloodbath in the House. The only specie of Democrat that's even entertained the notion of entitlement reform was the Blue Dog Democrat. As of this morning, that particular specie is extinct. The remnant of the Democratic caucus consists of aging, hard-core liberals who have spent a political lifetime accumulating anti-Republican bile against the policies of Reagan and the Bushes. Now, they'll play the only card they have left -- fostering hysteria among elderly voters about social security cuts.

The Democrat’s prospects for success are excellent and the reasons will shortly be evident. The gumption-challenged group of statesman appointed to the president’s deficit commission by the pols of both parties will soon issue the big cop-out -- opining that Social Security has a long-term funding problem, but not one that requires immediate, deep cuts in current benefits. That proposition, of course, is a convenient dodge that rests on the fiction of trust-fund accounting.

The fact is, the Social Security trust fund has $3 trillion of paper IOUs issued by the Treasury Department over the last 70 years, but not one dime of real money. Over that time span, we collected a modest excess of payroll taxes over current-year benefit payments, and spent the excess cash on cotton subsidies, student loans, and aircraft carriers. It’s all long gone.

The truth is, the Social Security program is a $700 billion per year inter-generational transfer payment program in which lifetime taxes paid by current recipients bear only a faint and arbitrary relationship to benefits now being received. So when the retirement “insurance” and trust-fund fictions are cut away, the underlying program cries out to be means-tested. To be sure, that would amount to a default on the implicit social compact that has undergirded the program since its inception. But in the context of the massive fiscal retrenchment which is now unavoidable, there's no rational alternative.

This is made starkly evident by viewing the alternatives. The only other element of the domestic budget of comparable size is the $600 billion we spend on means-tested safety-net programs including Medicaid. Yet unlike in the early days of the Reagan Administration when the president could fairly make points about the abuses of what he called welfare queens, today’s facts are very different. The safety net programs were substantially reformed in 1981, and then thoroughly tightened once again under President Clinton’s bipartisan welfare reform. Any additional savings are thus likely to be in the tens of billions, not the hundreds of billions actually needed.

Moreover, the burden of safety-net spending is now likely to rise for decades into the future because we're inextricably mired in a failed national economy. It turns out that there was no miracle of economic growth, productivity and prosperity over the last several decades -- even if Wall Street stock peddlers and Republican orators still cling to that illusion. What we had, instead, was serial bubble after bubble -- fueled by a tsunami of public and private debt and printing-press money.

The deflationary aftermath will be with us for years, and so will low single-digit GDP growth, chronic double-digit unemployment rates, and swollen levels of economic hardship among the lower ranks of society. In that context, we won't see the recent tripling of food stamp and unemployment compensation expenditures recede in the conventional cyclical manner, nor can we grow our way out of the currently ramped-up level of safety-net spending. Like much else, the current $600 billion social safety net is the new normal.

It might be wondered, then, how the very notion of domestic spending cuts could be credible if we don’t means-test benefits for the better-off elderly and can’t cut the safety net programs that are stringently mean-tested already. Yet approximately four weeks from now, that's exactly where we'll be. Based on its well-telegraphed leaks, the president’s deficit commission will solemnly pronounce that the single largest and most reform-worthy Federal program isn't even part of the deficit problem!

Next, almost upon signal, rancorous partisan warfare will erupt with a frontal assault by the Democrats and their left-labor-elderly allies on Congressman Paul Ryan -- the new leader of the GOP platoon on the House Budget Committee. Ryan is one of the few heroes of the current fiscal debate because he's actually managed to move his lips on the topic of Social Security reform. Indeed, so sweeping is the “Ryan Plan” on the matter of Social Security and other big entitlements that after two years the Congressman has managed to come up with a grand total of 13 Republican co-sponsors!

The upcoming campaign to stop the Republican budget committee from “destroying” Social Security will be wrapped in two simple but powerful messages: a) it's not broke according to the president’s deficit commission, so don’t fix it; and b) don’t cut grandma’s $2,000 monthly check in order to increase the after-tax income of millionaires by $2,000 per day. So ferocious will this campaign become that in a matter of months Congressman Ryan’s platoon of supporters will -- unlike in the movie -- abandon him in a field of hostile fire. Indeed, much of the Republican caucus will likely be taking a supplemental pledge even before the first Congressional recess; namely, to oppose the “Ryan Plan” in any way, shape, or form.

Once you set aside Social Security and the related retirement entitlements and the social safety net, you have about $600 billion of entitlements for Medicare and veterans programs. Since veterans are integral to the Republican “base," there isn't a prayer of cuts in the latter. And as to the former, it only needs be recalled that the sick care cartel of hospitals, doctors, drug companies, and scooter chair manufacturers that own the Medicare program have been assiduously bipartisan in their dispensation of campaign cash. Indeed, the GOP has already shown its true colors on Medicare. During the first six years of the Bush administration when it controlled both houses of Congress, it made no structural reforms of Medicare whatsoever, and, instead, grafted on the Part D drug benefit -- the largest single new entitlement program since the 1960s.

None of these blatantly obvious realities are likely to impress the dramatically swollen ranks of House Republicans. They'll predictably work themselves into a frenzy of tax-increase denunciation and rhetorical tilting at windmills on the spending front. But where does that leave them on their pledge to reduce the deficit and shrink Big Government? The short answer is that it leaves them in for a rude awakening.

On the fringes of the 75-plus greenhorns who will populate the Republican caucus, there appears to be some sentiment in favor a modern version of Senator Robert Taft’s sensible isolationism of an earlier era. At least some of the Tea Party crusaders appear to be saying, “enough of nation building and wars of occupation in the global backwaters." But wait until the neo-con thought police get done with “freshman orientation” at the Republican caucus meetings in December. The $800 billion that goes for national security and its step-child, homeland security, will be safe from assault -- at least from the anti-spending forces of the GOP.

The next rude awakening will be the old saw, "we have met the enemy and it is us." Republicans have been snorting loudly about runaway spending in the small $550 billion corner of the budget (13% of total outlays) called non-defense discretionary spending. The problem here is that about $125 billion of this was one-time spending contained in the Obama Administration’s misguided “stimulus” program. While Republicans may earnestly desire to cut these programs to zero, they can’t because under standard budgeting conventions most of these “emergency” funds aren't in the out-year budget baseline.

What is in the budget baseline is about $450 billion of spending for Head Start, the national park service, Amtrak, the national institutes of health, farm extension agents, and much more of like and similar motherhood. The inauspicious backdrop here is that when George W. Bush and the Republicans took power in January 2001, spending for non-defense discretionary programs were only $260 billion. So with nary a veto or government shutdown, the self-proclaimed anti-spending party managed to raise the budget by 60% during eight years of plenty. It might be questioned how likely they are to march back down the hill during the lean years now upon us.

In short, Tuesday night's results prove the Big Lie still sells. It's emboldened the GOP to an even more militant embrace of its destructive mantra of "no tax increase anytime, anywhere and for any reason." As the campaign cranks up, Washington will descend into a cauldron of partisan rancor. The Democratic remnant will counter with the most ferocious bloody-shirt campaign ever to “save” Social Security. Meanwhile, the Treasury will continue to issue new debt of $100 billion per month into an economy that cannot expand in nominal terms at more than a 3-4% rate or $50 billion per month.

So the real question from Tuesday night's outcome is how long can the US government issue its own increasingly toxic sovereign debt into the global market at a rate twice as fast as underlying economic growth? The cynic might say: as long as the Fed can continue to monetize 100% of the new debt issue, as it promised in Wednesday's $100 billion per month quantitative easing 2 (QE2) announcement. But it should be obvious to all except the insouciant boys and girls and robots of Wall Street that the world’s leading central bank is now dispensing pure monetary heroin. And, ironically, that’s likely to kill the patient before the fiscal question is even addressed.

ABOUT THE AUTHOR:

David Stockman was born in Ft. Hood, Texas in November 1946. He received his B.A. from Michigan State University in 1968. Afterward he pursued graduate studies at Harvard University, 1968-1970 and 1974-1975.

Stockman went to Washington in 1970 where he served as special assistant to U.S. Representative, John Anderson of Illinois, 1970-1972. He was executive director, U.S. House of Representatives Republican Conference, during 1972-1975.

He was elected to U.S. House of Representatives for the 95th Congress and was reelected in two subsequent elections, serving from January 1977 until his resignation January 1981.

He then became Director of the Office of Management and Budget under President Ronald Reagan, serving from 1981 until August 1985. He was the youngest cabinet member in the 20th century.

In 1986 Stockman wrote a best-selling book, “The Triumph of Politics.”

After leaving government, Stockman joined Wall St. investment bank Salomon Bros. and later became a founding partner at New York-based private equity firm, The Blackstone Group. He left Blackstone in 1999 to start his own private equity fund, Heartland Industrial Partners, L.P., based in Greenwich, CT.

David Stockman lives in Greenwich, CT, with his wife Jennifer Blei Stockman. They have two daughters, Rachel and Victoria.

He then became Director of the Office of Management and Budget under President Ronald Reagan, serving from 1981 until August 1985. He was the youngest cabinet member in the 20th century.

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And he was fired ( he actuallly quit, Reagan ‘took him to the woodshed’ and then ignored his advise) because he failed to appreciate and refused to support the Reagan tax cuts and testified to Congress against them and I see he’s still calling for tax increases. He is irrelevant.

The deal with means testing social security is this: Congress just has to pass it with a President that will sign it. It’s one of those things that the fear mongering is scarier than the reality, like the AFDC cuts in the 90. Talking about it gets demagogues going and people scared. You do it and nothing changes except in the positive. People wake up the day after, they are still getting thier social security checks if they need them, and the budget looks a lot better.

The future is that we default on some of our Treasury debt, and ask foreign buyers who don’t like it if they would instead like to meet the US Marine Corps, up close and personal. This will make the USA an economic pariah for decades, and our standard of living will continue to grind steadily downward as the world will slowly stop doing business with us. We’ll be Argentina in twenty years or less - a largish upper class living very well behind steel gates, a huge underclass living off what remains of the failed welfare state, and the big banks and other financial entities remaining thoroughly indemnified against the consequences of their business decisions.

Stockman is as big of a dreamer as most liberals. He sounds like David Broder operating in a fantasy world. Expecting politicians and their constituencies to act responsibly is for 16 year olds.

Truth: the US is a deadbeat nation that is too far gone for tweaking, and is too irresponsible for taking its castor oil. The contraption has to collapse, and force a solution that can’t be avoided. Just like any other deadbeat.

Poor little David. He’s been lost to the public spotlight for a couple decades now, and in his waning years he’s making one last attempt at making a name for himself, operating as an opportunist that has some great wisdom everyone else is missing. How much is he paying these days to get his junk published?

RE: Poor little David. He’s been lost to the public spotlight for a couple decades now, and in his waning years he’s making one last attempt at making a name for himself

Wonder if he ever got along philosophically with Larry Kudlow. They both worked at the Reagan budget office (OMB) if I recall correctly.

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