Wednesday, September 10, 2008

Two Failed Parties: The Real Political Narrative of The Past Half-Century

Let's just cut to the chase, shall we?

1. the conventions were simply mindless propaganda and therefore meaningless.
2. both party power structures are in complete, total denial that the nation and its government are heading for fiscal insolvency.
3. the next president will be a caretaker who presides over a dithering Congress and administration which will try to resolve the monstrous structural flaws by diddling around the edges of the crises.
4. the Powers That Be--the 1% which owns 2/3 of the nation's wealth, all its media outlets and the controlling stake in its political structure--will resist any fundamental challenge to its domination of the nation's wealth via Wall Street, the banking sector and the FIRE (finance, insurance, real estate) economy.

Did you really think I was going to be sucked into a soap-opera gabfest about hockey moms and Obama's "secret" religious faith? Give me a break!

The media loves all that, of course, because their primary goal is to get your attention so they can sell advertising. Sarah Palin is manna from heaven to the entire media from attack-dog "conservative" talk-radio to the TV networks and on down the food chain.

Without a doubt the Republicans and their attack-dogs ("conservative pundits") are the most blatant hypocrites of all time. For 28 years, the "conservatives" have been giving lip service (and note they held the reins to the Federal Administration for 20 of those years) to "fiscal responsibility" and "conservative values" while they have indentured future generations with a ballooning Federal debt and a government which spends ever more money--especially when when they control both Congress and the Presidency.

Don't bother arguing--this graph says it all:

It all started with Ronald Reagan, who gave Wall Street all it wanted under the guise of "supply side" tax policy (a.k.a. "voodoo economics") in which tax cuts would spur so much new growth that taxes would rise.

Reagan also scored big with a mantra that "the government is evil/bad/incompetent and needs to be restrained/reduced." Nice, but meanwhile he oversaw tremendous growth in virtually all sectors of Federal spending. It turned out the only government which got cut were "liberal" pet projects; meanwhile, the "guns and butter" spending grew by leaps and bounds.

If you are still naive enough to be a "party believer," then consider what Bush and Company accomplished when they controlled both the White House and Congress-- the largest expansion of government power and spending ever, and the enabling of the biggest credit bubble of all time.
It's pretty hard to play the usual "blame the Democrats" game when you controlled the entire government.

Not that the Democrats are blameless; Rubin and Clinton served Wall Street most ably by enabling the dot-com bubble and setting the stage for the housing bubble. The Repubs took the baton very smoothly and Wall Street and the bankers picked up some other goodies they'd been pining for, such as a restrictive bankruptcy law.

To understand the present, we need to understand the grand narrative of 20th century politics. Here is a brief summary.

Wall Street profited immensely from a huge credit bubble in the 20s. The Democrats ran various corrupt urban political machines, and the Republicans appealed to "Main Street" while kissing the rings of the Wall Street and industrial barons.

Unfortunately for the Repubs, Wall Street took down Main Street in the Great Depression.
Much has been written about what could have been done to "fix" the Depression, but the problems were structural and not repairable with the usual fixes of "more liquidity" and make-work government jobs.

As the pain spread, the Democrats squirmed out of their skins and fashioned a new identity--the protector of the now-disenfranchised white/Caucasian worker, both urban industrial and rural farmer, via redistribution of Other People's Money (OPM).

It should be noted here that the Democratic power base was essentially the most venal and corrupt in the nation: urban machines and a blatantly racist/oppressive South. The only real "Progressive" in the 50 years prior to 1940 had been Republican Theodore Roosevelt, who "betrayed his class" by busting the trusts and protecting some of America's vanishing wilderness from commercial exploitation/rape.

The Democrats seized the moment of Wall Street's disorder and shame to institute income redistribution programs paid for by OPM (collected as taxes), most importantly, Social Security which seemed to be magic. To the working-class stiff, it was amazing: the government collected taxes from other people, and then sent a check to Ma and Pa back on the farm.

Now the innovation here was not taxes or spending OPM but that the government had entered the business of sending OPM (via government checks) to individuals.

Prior to this, government performed services which were well-understood public services: the Armed Forces, police departments and municipal justice, school districts, etc. These were well-understood bureaucratic structures with long histories stretching back the Old Country, i.e. Britain. Of course there were plenty of opportunities for graft, nepotism, political influence, etc., but the limited size of these bureaucracies also acted to limit the size of government spending.
Now when Social Security began, the "magic" was all demographic: collect a small tax from 100 workers and their employers, and write a small check to one retiree.

But the hocus-pocus runs out when you're taxing 2 or 3 workers for every retiree, and the program has been expanded to fund "crazy money," recent immigrants' parents, etc.
Let's be clear about one thing: the Great Depression did not end until a Super-Keynsian explosion of Federal borrowing and spending showered trillions of dollars (in today's money) throughout the nation to fight a global war.

First, pull in 15 million young men and women into the military, in effect give them a job, a purpose and a paycheck (albeit a small one). Then hire tens of millions to build the armaments and infrastructure needed to handle all those armaments.

Incredibly, up until the Pacific War really started to heat up with land invasions on Japanese-held islands, there were more civilian workers killed in industrial accidents at home than combat deaths.

Next, put strict controls on prices and institute rationing of staples so inflation and income disparity are non-issues. Since consumer goods were set aside in favor of war production, people saved their money because there was little to spend it on. (Houses of ill-repute in the vast armed camps/ports like Honolulu did very well, of course.)

After the war, the Democrats built their national power base on providing an ever-expanding list of income redistribution schemes to their white working-class power base. In addition to the magic of demographics--lots of workers, few retirees--the Democrats benefitted from 10 years of deflation (1930-1940) and 5 years of price controls (1941-1946). That left the U.S. a very low-cost nation, with cheap resources, cheap land, cheap housing and cheap labor.

Of course the Democrats and Republicans alike were happy to enable Wall Street and the industrialists to profit immensely in the largess of war spending, and they were of similar mind about the proper place of non-whites--somewhere else than their neighborhoods and their circles of power.

Despite the built-in injustices and oppression of institutional racism and other social ills, the government was widely viewed as competent and responsive to the national needs, i.e. the Public Trust. In the 1950s and 1960s, taxes remained low while the government built the Interstate highway system, kept pace with the USSR militarily and eventually scored some wonderful coups in space with NASA.

FHA and VA loans enabled home ownership to rise from a Depression-Era 45% of the populace to 65%--a stunning increase. The GI Bill made college--once the preserve of the monied class--available to millons of veterans. Bolstered by government social spending--Ma and Pa were drawing Social Security, so no need to spend your own paycheck supporting them--and a productive, booming economy, working-class became the middle-class, and thanks to a strong dollar the newly minted middle-class could enjoy luxuries like foreign travel that had once been the exclusive preserve of the monied class.

(Even as late as the early 1970s, a dollar bought over 300 yen, making Japan a "cheap" destination.)

Strict government regulation was seen as beneficial or benign; given that Wall Street's credit bubble in the 1920s had led to the catastrophic collapse of the banking sector, tight restrictions on banking, insurance, margin accounts, and a host of other financial issues were seen as necessary to the health of the nation as a whole.

Other highly regulated industries also prospered, despite their high cost; for instance, the airline industry grew rapidly. Government regulation of agricultural production, food, water, land use and much else was seen as necessary to the "smoothing out" of the business cycle and to controlling the excessive greed which had nearly destroyed the nation in the Great Depression.
In the post-war boom, it was easy to give away more OPM--expand Social Security, expand college grants, expand welfare, expand food stamps, and then in 1965, begin covering the medical care of the nation's elderly via Medicare. The cost seemed trivial at the time; the first Medicare budget was less than the cost of one month of the Vietnam War.

But three structural changes were occuring beneath the surface. The essential conflict between the American value of equality under the law and institutional racism was finally surfacing in boom-time America, and the result--the civil rights movement--was inevitable.

At the same time, U.S. demographics was slowly working its way from the magic that enabled both low taxes and cutting millions of checks to individuals to the increasingly unaffordable Monster which requires ever-larger revenues just to cover the increasing number of beneficiaries and ever-larger benefits.

For more on this, please read one or all of these titles:

Fewer: How the New Demography of Depopulation Will Shape Our Future The Coming Generational Storm: What You Need to Know about America's Economic Future
While America Aged: the Next Financial Crisis

Third, globalization was taking off as war-ravaged Europe and Asia rebuilt with new plants and low costs (relative to the dollar and the U.S.) The first Toyota Bluebird entered the U.S. in the late 60s, and the Volkswagen Beetle was the toast of both the advertising world (for its brilliant campaign) and the Counterculture.

Unsurprisingly, the Democratic domination of Federal-level politics started falling apart as soon as the goodies were all given out and costs started to rise. Concurrent with the apex of social programs (income redistribution of OPM) and civil rights, the U.S. economy completed its 20-year Bull Market of post-war growth and began its 15-year slide into stagflation and stiffening post-industrial global competition.

After Medicare, there were no more goodies to give away--the Federal government had income-redistribution programs which covered the populace from cradle to grave. There were some holes left, of course, but in the main, a complete social "safety net" was in place: Aid to Dependent Children, Head Start, food stamps, college subsidies and of course Social Security and Medicare.

But a funny thing happened to the white/Caucasian Democratic base which had gloried in receiving all those nice middle-class entitlements--their incomes began falling just as their taxes started increasing. It's almost laughably simple, yet we resist understanding it: we can't each pay a few thousand dollars in Social Security and then draw down tens of thousands later, just as we can't pay a few thousand each in Medicare taxes and then each draw $500,000+ in medical benefits.

The demographics of longer lives, lower retirement age, rising number of retirees and an expanded class of beneficiaries were finally catching up to the easily granted and heartily welcomed middle-class entitlements which came in the form of checks to individuals or to their medical providers.

Formerly working-class and now middle-class white America was feeling the costs of entitlements via higher taxes just as campuses and ghettos exploded. What they had felt grateful for--a subsidized college education and social safety net-- were now viewed with contempt by their college-age children and the non-white urban populace. The benefits were insufficient, and taken for granted, and the resentment of the taxpaying public grew in direct proportion to the discontent on campus and in urban ghettos.

With the government gravy train running in reverse, the Democratic power base was structurally unstable, and the opportunity arose for the Republicans to shed their fusty old skin and "reinvent" the GOP. The Democratic convention of 1968 was a watershed event on many levels; the grand coalition of Democratic politics, the welfare state and urban political machines, smashed into demands from minorities and Caucasian youth for a more enlightened foreign policy and deeper structural changes to the remaining inequalities in the American system.

The straw that broke the camel's back was forced integration via bussing; to the typical Caucasian, it made no sense; here we've moved to the suburbs to get away from "those people," and now they're bussing them to our schools or shipping my kid to a ghetto school.

The government which had seemed competent and helpful, or at least benign, was now seen as malignant and coercive. Watergate and the Pentagon Papers had fatally wounded trust in the Federal government, and even though Richard Nixon had brilliantly parlayed a new Republican strategy of "law and order," "peace with honor" (sic), and a "southern strategy" of benign neglect of racial inequalities, his demise in Watergate opened the door for a Democratic resurgence.

(See the brilliant Hunter S. Thompson's Fear and Loathing: On the Campaign Trail '72 for more.)
But like all victors of past wars, the Democrats kept trying to win the new war with the same old strategies which no longer worked. Seeking a way out of stagflation caused by globalization and structural increases in cost (including, we should note, the welfare state, which had ballooned the size of government), both the Republicans and Democrats flailed around with price controls, industrial subsidies and other World war II-era policies which only seemed to exacerbate the economy's troubles.

While both parties continued pandering to Wall Street and the industrialists, both were suffering from a malaise which political pork and the usual corporate welfare could not repair.

The natural end-state of the Democratic "let's give more benefits" mentality is identity politics, in which various subgroups attempt to split the shrinking pool of OPM spoils based on victimhood, resentment, confrontation and historical injustice.

This splintering into "give me my shares of the spoils" constituencies led to cartoonist Gary Trudeau's biting mockery of the 1980 Democratic convention, in which an unruly mob finds release of their frustrations by chanting, "Nuke the Iranian gay whales!"

The structural flaw in the American economy was quite simply that tax revenues and economic growth could not keep up with the costs of military supremacy and burgeoning entitlement costs. As I have stated here many times: you cannot support entitlements growing at 6% a year with an economy which grows at best at 3% a year. That is simple arithmetic. But that would have required painful cuts in entitlements the middle-class had grown to know and love, and so the stage was set for a national illusion: that taxes could be cut and spending increased, basically forever, with borrowed money filling the gap between revenues and spending.

Enter Ronald Reagan and the hocus-pocus which we have willingly believed like simple-minded children for the past 28 years--we can "grow" taxes to pay for military supremacy and vast, fast-ballooning middle-class entitlements by--drum roll, please--cutting taxes and cutting intrusive, incompetent government.

That prospect cut like a hot knife through the soft buttery remains of the Democratic coalition, and Reagan won by a landslide, ushering in an string of Republican administrations hawking the same now-discredited idea, interrupted only by a southern small-state Democrat (Clinton) who squeaked in only because deficit-hawk Ross Perot bled off the 10% of the Republican voters who understood rising deficits forever is not a wise strategy in terms of what we leave our children.

The loss of faith in government also enabled Reagan to slash and burn any and all regulations--not just ones that hobbled "free enterprise" (that's in quotes because in modern capitalism that is a theoretical construct, not a reality; everything is regulated whether by design or default) like airlines, but Public Trust regulations which protected the populace from environmental pollution.
( Please search for "The Tragedy of the Commons" if you don't understand how this works--I poison you and your kids because it cuts into my profits to treat the wastewater from my plant--yea for free enterprise!)

Unfortunately, government spending didn't drop during the Reagan years--it expanded rapidly. The chastened Democrats entered into a Devil's Pact with the GOP--keep expanding middle-class entitlements, and we'll approve your "guns and butter and borrow" budgets.

Despite ideologically satisfying "wars" over "welfare queens," "Catsup is a vegetable" (uh, a tomato is technically a fruit, people) and other political-theatre folderole, the fundamental reality was that structural deficits were now permanent features of government tax and spending policies.

Bill Clinton--certainly the luckiest president of the 20th century--happened to be elected under a "reinventing government" banner just as tax revenues exploded as the Internet revolution, born and raised in the U.S., rapidly conquered the globe.

But that burst of growth hid the underlying trend: industrial globalization had transformed the U.S. economy and reduced most middle-class incomes. The cost structures in the U.S. which had been rising since the post-war boom were ever more onerous compared to lower cost nations in Asia, and production of goods left for Mexico, Asia and elsewhere.

This transformation reduced the incomes of the non-professional middle-class even as it created trillions of dollars in boosted profits for U.S. corporations.

To make up their declining incomes, the middle-class threw themselves into the bubbles of the dot-com era and the housing bubble. Wall Street, meanwhile, was feasting on the deregulated FIRE economy (finance, insurance, real estate), and so while the Republicans continued their "cut taxes, increase spending and borrowing" policy of pandering to everyone under the sun, everybody from Wall Street to Main Street seemed to be prospering.

Just like they did in the late 1920s. Credit bubbles, like the tides, raise all ships by their very nature; and so now that the greatest credit bubble in the history of the world has burst, Wall Street has once again taken down Main Street.

Now we come to the present. Here it is, baldly stated: neither the Republicans nor the Democrats can part with their failed strategies.

The Republicans--the biggest hypocrites on the planet after spending 28 years borrowing from their children and grandchildren to fund their own guns-and-butter fantasies--have boxed themselves into a corner with their "cut taxes but don't cut spending" mantra. If they seriously cut middle-class entitlements--which is the only way to rein in spending--they will lose their base. But if they raise taxes on either their top 1% "best friends" or their middle-class base, they will also lose their base and their Fat-Cat contributors.

The Democrats, meanwhile, keep trying to cobble together the coalition they lost in 1968--politically disenfranchised whites and non-whites. Unfortunately for the Democrats, however, the key part of the postwar success was ever-increasing benefits and entitlements. Now that the economy is in terminal debt-loaded decline, there is no more gravy in the train, and their upper middle-class base on the Left and Right Coasts is resentful of paying 40-50% taxes while their lower-middle class base pays virtually no taxes other than 7.5% FICA (Social Security).
What neither party can willingly grasp is the cost structure of the U.S. ecoomy has exploded to unaffordability on every level. College: unaffordable. Medical care: unaffordable. Local government: unaffordable. The list is endless. The only affordable items are goods manufactured in Asia, and everyone already has one or two or three of those.

Both parties fear losing their base, so they each cling to their own corner of Fantasyland, in which borrowing trillions from our trading partners will somehow save the day and make the horrible mismatch between revenues and spending go away.

Alas, their profligacy, political cowardice and willful blindness has set the U.S. sliding down an irreversible path to complete and total fiscal insolvency, at every level of government and at every level of the private economy.

Their top 1% PTB "best friends" are weeping and sobbing and gnashing their teeth, begging please save us! and of course they quickly responded with a massive, unaffordable bailout of Wall Street and the entire lending and housing industries.

But since the structural problem is deficit spending, then borrowing trillions more is literally like trying to put out a fire with gasoline.

Here it is in a nutshell: Keynsian "deficit spending" was supposed to be reserved for deep recessions, but instead it has been the basis of our bogus "prosperity" for 24 of the past 28 years.
While Wall Street pocketed hundreds of billions selling 2+2=5 securities and leveraging $1 into $50, $60 or even $100, the government has borrowed trillions which our children and grandchildren will be paying interest on forever.

The interest is not a trivial sum; it already exceeds all Federal government expenses put together except for Defense, Social Security and Medicare. Once interest rates rise--and I expect them to rise unexpectedly, and suddenly, as a result of a "credit event"-- then that interest will rapidly overtake first the Pentagon budget and then Medicare, which currently accounts for about $500 billion in Federal spending.

The parties will then face a most uncomfortable dilemma: they will be unable to raise taxes or borrow more money, and thus they will either have to cut benefits drastically, renounce the debt, or hyper-inflate the dollar so they can pay back all debt with worthless currency. Not a happy set of choices, but there are no others. The idea that we can just borrow a half-trillion dollars each and every year forever with no consequences is sadly not based in reality.

(And that's not counting the hundreds of billions borrowed at the state and local levels via muni bonds.)

So now we return to the beginning: the Powers That Be (the 1% which owns 2/3 of all assets and the media) and an American public accustomed to 50 years of rising entitlements will not accept re-regulating the economy and reductions in entitlements. Thus the next president will be a caretaker, flailing uslessly around with immaterial reforms and policy tweaks while the economy founders toward to ruin.

Will either party "reinvent" itself to deal with reality, or will a new party emerge with a consensus of voters willing to make necessary sacrifices and willing to corral the PTB and Wall Street/bankers? Very few understand the slope we're sliding down, and none of us can foresee what the political response to our ruin will be.

As for the soap opera/political theatre, just ignore it all; it's utterly meaningless.

Books of related interest:

Only Yesterday: An Informal History of the 1920's
Since Yesterday: The 1930's in America, September 3, 1929 to September 3, 1939 (both by Fredrick Lewis Allen; recommended by reader Wayne)
Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders
Collapse: How Societies Choose to Fail or Succeed
The yankee and cowboy war: Conspiracies from Dallas to Watergate
A History of Money and Banking in the United States: The Colonial Era to World War II
The Nine Nations of North America
Whistling Past Dixie: How Democrats Can Win Without the South
Web of Debt

New Book Notes: My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on for $10.99.
"Charles Hugh Smith's Weblogs & New Media: Marketing in Crisis is one of the most important business analyses I have ever read. It is the first to squarely face converging global crises from a business perspective: peak oil, climate change, resource depletion, and the junction of key social cycles will radically alter the business landscape in coming decades...."

An excerpt from Weblogs & New Media: Marketing in Crisis :

9. What constitutes status and prestige will undergo substantial transformations as scarcity of essential commodities collides with overabundance of manufactured goods and marketing.
Where in the past a mass-produced consumer good could (with sufficient slight-of-hand) be presented as status enhancing, global overabundance of virtually all mass-produced goods (both legitimate and pirated) has eroded the value of retail/consumption status. Luxury brands such as Mercedes and BMW have cheapened their appeal with lower-cost production lines which sport the coveted logo; other luxury brands have found the easy availability of perfect pirated copies has eroded the all-important associations of wealth and status.

Thank you, Alberto R. ($20), for your continuing contributions of ideas, commentary and money to this site. I am greatly honored by your support and readership.

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