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Posted by on Apr 28, 2010 in Economy | 0 comments

The March of Economic Ignorance

Financial analysts have downgraded Greek bonds to “junk” status, indicating a heightened risk of default.  Portugal, Spain, and Ireland are also inching towards the brink at which bond traders simply refuse to buy more sovereign debt because they do not believe it will be paid.  This is a crisis of confidence — a problem based on a widespread, justified belief that high spending without equally high revenue is simply unsustainable.  When the bill comes due and the national credit card is maxed out, the result is political paralysis.  The syndrome can already be seen in Greece, where government workers unwilling to accept reality go on strike rather than accept pay cuts and where a frankly ignorant electorate accustomed to having the government pay for everything while charging only moderate taxes refuses to countenance either spending cuts or tax increases.

The same syndrome is already underway in the United States, with no sign that the electorate is any more conscious of the impossible contradiction they have embraced.  The clearest early signs are in California, where the state government labors under a massive deficit, but where government workers unions refuse to tolerate any reductions in the state’s massive employment entitlements while taxpayers refuse to tolerate any reduction in services or increase in taxes and activist groups bitterly denounce even the slightest scaling back of government programs as a war on the poor.

California’s dilemma is mirrored at the national level, albeit at an earlier stage.  Even using the rosy scenarios mandated by Democratic Congressional leaders in their binding instructions to the putatively non-partisan Congressional  Budget Office, the U.S. is projected to run deficits of more than a trillion dollars per year for the indefinite future.  And proposals to cut spending in major programs like Social Security, Medicare, and defense are completely blocked by powerful interest groups at the same time that a public struggling to emerge from a major recession has no tolerance for tax increases.  The usual technique is to demand spending cuts in one area — say, defense — in order to protect another — such as Social Security — from even being considered for cuts.  But since that same process is mirrored by commentators on the other side, the result is paralysis covered up by a grotesque kabuki dance of preening commentators who pretend to be serious when they are really just indulging in self-serving fantasies.  To mix a metaphor, everyone wants to have their cake and have someone else pay for it.

Well, for over a decade now, the tab has been picked up mostly by accounting gimmicks that exploit the surplus in the so-called Social Security “trust fund” and purchases of U.S. debt by China.  But this can’t and won’t continue.  Burgeoning retirements by the so-called “baby boomers” have already tipped the Social Security and Medicare funds out of surplus and into deficit, a state that will only worsen dramatically for the foreseeable future.  And Congressional Democrats have already used blatant accounting tricks to hide what will in reality be a massive increase in Medicare funding commitments under the rubric of “health care reform”, with more spending increases on the way.  And China is frantically signalling that their willingness to buy U.S. debt is rapidly waning.

When the Big Bust comes to America, the result will make the Greek crisis look like a minor economic sneeze.  It is almost certain that the paralyzing economic self-delusion that already seizes California will spread across the country.  It is impossible to believe that those powerful interest groups who defend massive Social Security and Medicare entitlements, for example, will suddenly regret their self-absorption 5 years from now.  Instead, they will demand defense cuts.  Meanwhile, workers and investors in the defense industry will similarly resist and, even if they didn’t, even the complete elimination of the defense budget would still leave the U.S. budget in deficit.  Meanwhile, tax increases at a level necessary to close the gap would be denounced as “socialism” by massively mobilized and reinforced “Tea Party” activists and would almost certainly be highly unpopular among the all-important middle class still struggling to get out from “under water” mortgages.  And, even if it could be enacted, the “tax the rich” mantra beloved by many progressives is flatly incapable of generating even a fraction of the necessary revenue without throwing the U.S. into another massive economic downturn.  Mirrored delusions grip both right and left, and serious thinking is non-existent on either side. The problem will not be solved by politics as usual or, indeed, by any politics that is comprehensible given current alignments and the pervasiveness of gross ignorance.  De Tocqueville’s prophecy of an American democracy undermined by the combination of voters’ ignorance and narcissism is coming true before our eyes.

Only a dramatic increase in the level of economic knowledge of American voters has any hope of changing the self-delusion that paralyzes policy.  If voters could be made to understand the basic ideas that government services cost money and that money has to be paid by everyone, not just “the rich”, then there would be some small hope of rational political choices. But, given the gross and willful ignorance of Congress and the media elites of these basic economic realities, it is unclear where this could possibly come from.  And any attempt to build economic knowledge among the voters would be harshly resisted by self-interested groups of retirees, investors, and government workers’ unions for whom any increase in voters’ knowledge would threaten their gravy train.  The reality of what is necessary — massive cutbacks in entitlements combined with massive cutbacks in defense spending and substantial tax increases across all economic groups — is not just politically unacceptable, it is actually incomprehensible to partisan opinion leaders all around.  We’ve reached the point where basic math is beyond the cognitive capabilities of those who pose as our intellectual and political “leadership”.

The paralysis in Greece that threatens to contaminate much of the rest of Europe is only the tip of the iceberg.

The author welcomes serious comments and discussion by email.  Comments which are substantive may be published as updates to this post.  Comments which play infantile partisan games will be printed out on low-quality paper and drop-kicked into a green recycling bin.