Burgess COMMENTARY

Peter Burgess

An Independence Day Reflection: America’s Next Challenge Is the United States on the verge of a major civil transition?

By Robert H. Dugger, June 30, 2008

Takeaways

Economic problems occur when supply and demand conditions send the economy into a downturn. Civil problems occur when the government disappoints citizen expectations.
Citizen imbalances become a problem when they are inconsistent with citizen expectations and threaten family and economic security.
If the breach of expectations is severe enough, citizen outrage will mirror the sentiments that led to the Civil War or women's voting rights movement.
The federal budget imbalance is currently unsustainable — meaning the relationships it reflects are also unsustainable.
Transitions from sustainable civil balance to unsustainable and intolerable imbalance mark points in time historians use to note turning points.

The roots of current U.S. difficulties reach deep into the middle of the past century. Decisions made in the 1950s to pursue consumption-led growth as part of the U.S. Cold War strategy led directly to current problems — and have created unsustainable civil imbalances among its citizens.

The U.S. policy to exhaust year-by-year its own savings and then depend more and more on the savings from other countries is unsustainable. The government budget conditions that resulted from this policy — and the civil relationships they represent — are also unsustainable.

Government budgets define relationships among citizens. They define who gets what, who pays for what — and who owes what. As budgets are steadily shaped by legislators over decades, their provisions come to define relationships of benefit and obligation among citizens.

Yes, these relationships are economic — but they are also civil because they involve expectations about what citizens are going to do for each other based on law and custom. A surprise breakdown in these expectations is politically more disruptive than a surprise shift in economic conditions.

Overlays of economic and civil relationships are all around us, though we often do not notice them or their effects. For example, if oil supply and demand conditions change and drive up heating oil prices, your local dealer may have to raise his prices more than you can pay. As a result, you have a cold house — but the cause is economic.

However, if the dealer promised to deliver heating oil to you no matter what, and failed to deliver, you still have a cold house — but the cause is civil. Yes, your main problem is the same — your house is cold. But the source of the problem is different, and most likely your emotional response is a lot different.

When you saw the dealer as caught in supply-demand conditions outside his control, you knew you could not rightfully ask him to sell you heating oil at a loss and put his own family at risk. You may have been disappointed, but you were not angry.

When you felt he was breaking an agreement, it was a different matter. The dealer put himself forward as an expert on heating oil and a reliable businessman. You trusted his judgment and his commitment to provide you what you needed. As a result of the breach, you were disappointed and angry.

At the national level, economic problems occur when supply and demand conditions outside a country’s control send it into a downturn. Civil problems occur when a country’s government disappoints citizen expectations based on national ideals, customs and law. Economic problems can send consumer confidence surveys into the basement.

Civil problems can trigger deep citizen reactions leading to political movements — and even war. If the civil relationships embedded in a national budget (and all their obligations, benefits and expectations) are unsustainable because national budgets are unrealistic and unsustainable, there will be voter disappointment and anger.

The source of the anger is the breach of trust and disruption of relationships. In the 1700s, British colonialists in America viewed themselves as worthy of full British rights, and particularly membership in the British parliament. The most educated were fully aware of British traditions and common and statute law.

Denied representation in the parliament, they could see full well that Britain’s capacity to tax them was unlimited. This “taxation without representation” flew squarely in the face of British ideals and threatened the economic security of the families of the colonialists.

On the other side of the Atlantic, British political leaders could easily see that if they permitted American membership in the parliament, the lines of voting power would eventually cross — and American economic and population growth would mean majority control of the British parliament would shift to American hands.

The result was an imbalance between American and British citizenship. Per se, citizen imbalances are not a problem. They become a problem when they are inconsistent with citizen expectations based on custom and law and threaten family and economic security.

When this happens, the imbalances have to be corrected by one means or another.

The Southern states in the 1850s faced a similar situation. They could see the North’s steady economic and population growth — and knew that in time voting control in the U.S. House of Representatives and Senate would shift to Northern anti-slavery hands.

In this instance, the civil imbalance was between free and enslaved Americans. The Civil War was the way that imbalance was corrected.

The process of correction seems to be associated with transitions from one phase of history to another. Transitions from sustainable civil balance, to unsustainable and intolerable imbalance, and back to sustainable balance again, frequently mark points in time historians use to note turning points. To mention just a few: the French and Communist “revolutions,” the two World Wars — and the end of the Cold War and the fall of Communism.

In the domestic United States, the larger the civil imbalances were, the more painful and politically explosive the transitions. In the current situation, as we will see, the federal budget imbalance is unsustainable — meaning the relationships it reflects are unsustainable.

If the breach of expectations is severe enough, citizen outrage will mirror the sentiments that led to the American Revolution, the Civil War, the women’s voting rights movement and the civil rights movement.

In hindsight, all four of America’s major civil transitions seem avoidable. The paths from bearable to unbearable conditions were very slow. Whether we are talking about late 1700s British tax policy or the erosion of southern congressional dominance, the “crossing of the lines” was clear many years before the crises.

Looking back, it seems there was plenty of time to prevent the American Revolution, the Civil War, the long struggle for women’s voting rights and the turmoil of the civil rights movement. Why were people at the time unable to anticipate the inevitable and act accordingly?

The answer, of course, is the near-term costs of giving up civil advantage by favored citizens were simply greater than the longer-term benefits. But maybe this time, U.S decision makers will manage to put aside short-term economic gains in favor of long-term civil stability — and avoid having history repeat itself once again.

Editor’s Note: Parts II and III of this essay will be published on The Globalist this week.

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Globalist Paper

The U.S. Federal Budget and Civil Imbalances ... What will be the central challenge facing the next U.S. president as the budget grows tight?

By Robert H. Dugger, July 1, 2008

An Independence Day Reflection. Part 2 of 3.

Takeaways

The coming budget struggle will mark an end to a phase of U.S. history and the transition into a new set of civil relationships among Americans.
Spending commitments that exceed reasonable growth expectations will eventually mean painful tax increases or service reductions — or both.
The United States will become a very different and very unpleasant place. As the fiscal oxygen diminishes, people and businesses will likely fight for air.
Is the U.S. budget — and the citizen relationships it represents — so out of balance that we should worry about voter anger and political turmoil?
Voters are frightened by the weak condition of household finances and their rising vulnerability to sharp drops in income.

The confluence of economics and politics is government budgeting. It is in the budget process that elected officials attempt to meet the needs of voters and desires of important interest groups, achieve national interests and provide the conditions for economic growth and job creation.

Key elements of government budgeting are sustainability and equity. Foreseeable revenue and spending levels should be sustainable decades into the future.

This is a core element of the trust citizens place in their government. Spending commitments that exceed reasonable productivity and growth expectations will eventually mean painful tax increases and/or service reductions.

Unsustainable budgets mean eventually “lines will cross” and citizen expectations will be breached, long-standing relationships will be broken — and a civil transition to a new set of expectations and relations will begin. If the breach is severe enough, conflict of some kind may be inevitable.

Is the U.S. budget — and the citizen relationships it represents — so out of balance that we should worry about voter anger and political turmoil? The answer depends on whether, as the budget “lines cross” over the next 15 years, U.S. voters will remain comfortable with huge tax or deficit increases or spending cuts in every service the government provides.

When I refer to “lines crossing,” I mean federal resources for discretionary spending will be exhausted absent large tax or deficit increases or spending cuts. “Discretionary spending” includes everything the U.S. government does — except for interest payments on the national debt, benefit payments for Social Security and Medicare and other mandated entitlements, as well as federal tax expenditures.

As resources for discretionary spending diminish, there will be no money for national parks, for Head Start — or, for that matter, the Army or the Navy. No money for hundreds of government services and functions. No immigration control. No federal court system. No Homeland Security. No college scholarships.

Instead, all federal revenues will be absorbed by national debt interest payments, Social Security and Medicare and other entitlement payments and federal tax expenditures.

This last category includes subsidies and loopholes granted to politically powerful interest groups through the tax system — everything from the home mortgage interest deduction put in place to subsidizing housing, to private jet aircraft subsidies to support the U.S. aircraft industry.

Well before the lines cross, however, the United States will become a very different and very unpleasant place. In five years — just 60 months — there will be as much as 30% less money for much of what the government now does.

In ten years, the figure will be nearly 60% less. As the fiscal oxygen diminishes, people and businesses will likely fight for air. This fighting will be the answer to the question: Will Americans remain comfortable with their government’s failure to assure budget and relationship stability?

Total Mandatory Spending Will Exhaust All Federal Revenue Resources by 2024

The “lines crossing” — or “zeroing out” — of resources has been forecast for many years. In many ways, it is similar to the way U.S. businessmen, years in advance, saw the tax power of the British government — and the way the Southern states saw the westward expansion of the non-slave Northern states “zeroing out” their voting control of the House and Senate.

If Americans are sensing that the “lines” of their civil relationships are changing fundamentally, U.S. political conditions may be changing in historically important ways. These conditions may be aligning in ways that can only be resolved through conflict comparable to the turmoil that led to the last four major U.S. civil transitions — the American Revolution, the Civil War, women’s suffrage and the civil rights movement.

Are there signs that U.S. voters are anticipating problems? Is there evidence that voters are sensing that trust in government budgeting may not be well-founded — or that long-standing civil imbalances may become intolerable? Polling data suggests the answer is yes.

Voters are frightened by the weak condition of household finances and their rising vulnerability to sharp drops in income. In recent years, most U.S. families could not maintain their living standards without going deeper into debt.

Voters seem to sense that U.S. economic conditions are unsustainable. In poll after poll, they say the United States is on the “wrong track.” Similarly, they sense that for this to happen, the power of interest groups in Washington opposed to change will have to be overcome.

The two major-party presidential candidates — Senators Barack Obama and John McCain — are acutely aware of voter sentiments and are battling to be seen as anti-establishment in voters’ eyes. Obama does not accept campaign contributions from lobbyists — and McCain is firing major lobbyists on his staff.

Both have worked to enact Congressional ethics and campaign reforms. The efforts of Obama and McCain to be seen as independent of special interests are early evidence of the impending political struggle. In the upcoming presidential campaign, the early cannon fire of the fifth U.S. civil transition will be heard clearly.

Relationship imbalances within the federal budget take many different forms. Four are easy to identify: geography, lines-of-business, income and generation.

Some regions of the country get more per capita than other regions. Some kinds of businesses receive more subsidies than other businesses. Some income groups receive more benefits than other groups. In addition, older Americans get more than younger Americans.

As discretionary budget resources decline, these relationships will be shattered, and voters and businesses will be pitted against each other in fights over budget resources, over increases in taxes and deficits and cuts in entitlement and tax expenditure.

This coming budget struggle will mark an end to a phase of U.S. history and the transition into a new set of civil relationships among Americans. Getting the United States through this transition will be the central challenge of the next presidency. To get through it successfully, the United States will need — as it did in past transitions — a unifying central principle.

When Abraham Lincoln was running for president, he was often asked what the highest priority of his presidency would be. He said the principle that would guide his policy choices would be to preserve the Union.

He chose that principle because he knew that if he could preserve the Union, he would be able to preserve the Constitution and the ideal of the Declaration of Independence that we are all “created equal.” He believed that if he could preserve this ideal, the slave-free imbalance would be eliminated one way or another — quickly or slowly, through peace or war.

The United States now needs a principle that will guide its budget choices. The principle should be one that makes solid long-term economic sense and is consistent with the common history of Americans. Furthermore, it needs to make sense politically.

That is, it needs to be a principle voters understand and support at the most personal and fundamental levels. The principle that ultimately prevails will probably be one that speaks in terms of an American sense of equal opportunity and life success and calls for allocating resources on the basis of proven long-term economic returns.

So far, however, no candidate has, in a forceful or public way, articulated a Lincolnesque principle.

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Cold War Roots of U.S. Economic Problems ... How did the U.S. trade policy shift after the Cold War?

An Independence Day Reflection. Part 3 of 3. Takeaways
The high-production, high savings strategies of the recovering and developing countries were matched by a U.S. high-consumption, low-savings economy.
Asian economic, financial and political frameworks were not optimal for a post-war environment.
After the Cold War ended, democratic and market liberalism became the foundations of future global growth.
Import-substitution and export-led growth strategies were ingredients of the economic recovery plans of WWII-scarred Japan and Germany.

In the uncertain years immediately after the Second World War, U.S. political leaders erected a credit-financed, consumption-led economic framework. It was designed in large part to support job creation and the economic growth of its Cold War allies. The strategy succeeded. The United States and its allies won the Cold War. But the strategy put in place a set of conditions that are now the central challenge of the next U.S. presidency.

The United States became the global consumer of last resort for the export goods of first Germany and Japan — and later all the countries surrounding the USSR and China. The goal of the United States was admirable — to help redevelop the economies destroyed by the war and to keep workers in those countries from being attracted to the promises of communism.

The strategy succeeded. The Western democracies prevailed. With the fall of the Berlin Wall, the Cold War ended and democratic and market liberalism became the foundations of future global growth.

Import substitution and later export-led growth strategies were key ingredients of the economic recovery plans of World War II-scarred Japan and Germany and other Western ally countries surrounding the former USSR and China.

This is particularly clear in Asia from the 1950s into the early 1990s.

Japan, followed by the Asian Tigers and other “newly industrialized countries” in the “flying geese formation,” successively pursued national economic plans. All were focused on substituting domestic production of basic goods for imports — and then moving up the production chain to maximize growth through exports to the developed world.

The United States served initially as a capital provider and then as the linchpin importer/consumer-of-last-resort to support these recovery and development strategies. The United States — through grants, development loans and defense arrangements — met the early capital needs of its Cold War allies in the 1950s.

At the same time, the United States de-emphasized savings and encouraged consumption — even to the point of providing tax deductions for consumer credit interest expenses. This policy supported the evolving export-led growth strategies of U.S. allies. The high production, high savings strategies of the recovering and developing countries were matched by a U.S. high consumption, low savings economy.

In the early decades of the Cold War, the United States and U.S.-backed international financial institutions were net suppliers of capital to Iron Curtain allies to finance recovery and import-substitution development strategies.

As these countries stabilized and shifted to export-led growth strategies, U.S. trade deficits appeared and then deepened, and U.S. dependence on capital inflows from Cold War allies became established.

This system of export to the United States started to break down in the 1990s. Diminishing marginal returns to export-led growth set in — and a zeroing-out of the strategy occurred in the mid-1990s.

The explanations offered by the United States and other G7 governments (that the Asian downturns of the mid-1990s were mainly the result of “crony capitalism,” inadequate financial supervision and a lack of transparency) are incomplete.

The downturns were, of course, in part due to these factors, but the important question is how “Asian miracle workers” became “crony capitalists” in a matter of three or four years. Something is missing.

What is missing is a recognition that national security is the highest domestic political priority of any country. Domestic economic policies are shaped to maximize national security. The U.S. Cold War economic policies were in contrast to those the United States pursued to win World War II. To win World War II, the U.S. became a high production, high savings economy.

The United States essentially out-produced its enemies. To win the Cold War, the United States became a low-savings, high-consumption economy. It basically supported its allies in a recovery, development and growth process that out-consumed the USSR and China. The United States exhausted the USSR and forced China to change its policies on domestic investment.

The United States was able to support its allies in a recovery, development and growth process that exhausted the USSR and forced China to change its policies on inward investment.

The matching consumption-led and export-led economics pursued by the United States and its Cold War allies were optimal for addressing the priority of winning the Cold War — but not for a non-war environment.

The magnitude of the Asian adjustments following the end of the Cold War shows that Asian economic, financial and political frameworks were not workable for a post-war environment. As soon as the Western capital markets and democracies were not required to prop up those frameworks, they ceased doing so, and “Asian miracles” became “crony capitalism.”

The unsustainble U.S. federal government budget and the fragility of American household finances are expressions of the U.S. Cold War consumption-led growth policy. In the 50 years from 1947 and the enactment of the Marshall Plan to restore the economic strength of U.S. Cold War allies, to today, the U.S. budget and American households have slowly shifted from strength to weakness.

The ability of the U.S. government to pay for basic services, including the court system and the military, will be exhausted within 15 years unless Congress enacts massive tax increases, deficit increases or cuts in spending. Without these, all government revenues will be used up by Medicare, Social Security, tax expenditures and interest on the government debt.

The majority of U.S. households have gone from financial strength to weakness. Last year well over 50% of U.S. households could not maintain their living standard without going deeper into debt. These same households do not have enough ready cash to carry them through the loss of just two paychecks.

Polling indicates U.S. voters are deeply worried about their economic futures and are very suspicious of the power of “special interests.” Their worries are mirrors of the consequences of Cold War economic policies and political power of those who benefitted from them.

Presidential candidates Barack Obama and John McCain are positioning themselves as independent, “change-oriented” candidates. Neither candidate, however, has talked about “change” as meaning Americans have to shift away from the main policies of the past half century. Until they do, U.S. economics and politics will be unable to escape the grip of the past — and the risks of civil instability will deepen.

Editor’s Note: You can read Part I here and Part II here.

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The Price of Liberty
The U.S. Federal Budget and Civil Imbalances
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Tags: 1997 Asian banking crisis, 2008 US elections, Asia, Barack Obama, budgets, China, Cold War, consumer economy, containment, debt, debt payments, deficits, development aid, entitlements, foreign aid, foreign policy, Germany, Japan, John McCain, Marshall Plan, Medicare, social security, Soviet Union, United States, World War II About Robert H. Dugger