History Forum / General / General Topics / July 2008

I sympathize Hardpan. Reading Jared Diamond's latest, "Collapse" I
notice that when the resource base is maxed, the power elites, rather
than cutting back to buy time to look for solutions, increase their
exploitation of all lower classes so as to keep increasing the perks
and luxury they've enjoyed to give the illusion that "progress" continues.

Course, there is the unintended effect on increasing stress on the
middle class- the workers who maintain the infrastructure you refer to.
They work longer hours for less pay because of the power elite exploitation.

Machiavelli and Gibbon picked up on this. They saw that the aristocracy
encouraged immigration to Rome from tribes that lacked strong republican
traditions to flood the market with workers to drive wages down. They
also funded the campaigns of demagogues pandering to ethnicity and
religion, promising one thing to them in their own language, but saying
something else in Latin to the Romans.

Meanwhile the senate reduced the taxes on the rich and increased them on
everyone else. Mach saw this a lot, noting how, since a republic cannot
tax the rich, and the lower classes are soon bankrupt, that they then
borrow the money from the rich to run the government. Which works until
some creditor sees the tax base will no longer the interest, much less
pay off the loans. Somebody either no longer has the money to lend, or
refuses, and that crashes the whole system.

There's no money to pay the military. Food prices rise, there are riots
in the streets, and the proverbial schitt hits the fan. When this came
down in Rome, Caesar had just finished looting Gaul, so he had the money
to pay his own troops and took over. Mach notes how some demagogue will
arise from among the people to take over, the military seeing where the
followership is and going along.

Either way, the new leader seizes the assets of the rich to gratify the
instinct for revenge from the lower classes trying to rebalance the
books. Which dont work all that well because while the rich provide a
very high cost of management, no management at all produces famine.

The recent "stimulus package" is an attempt by the power elite to return
some of the money they've extracted from the lower classes. Machiavelli
says corrupt republics always respond to crisis too little, too late. We
will see. The US economy has been lucky and endured stress before.

But we may see the dismantling of the Untied States of Denial such as we
see so often in the collapse of empire. "Constant Battles" says that the
dissolution breaks down in different degrees in different areas. Jared
Diamond, in "Collapse" shows how those areas that have minorities tend
to have demagogues arise scapegoating, whereas those with homogeneous
populations, lacking an easy target, pull together to find solutions.

Thus, when the USSR collapsed, the Southern multi-ethnic Red states who
were so dependent on contracts from an obsolete military industrial
complex and factory farms (agribusiness) saw demagogry, genocide, and
famine. But the homogeneous NW Coast Blue Baltic States threw out the
Soviet bureaucrats, and the lights in Riga, Tallin, and Vilna didnt even
blink. In both cases the high cost of management was eliminated, but in
the latter, local management effectively replaced the power elite.

If the US economy does not get dynamic visionary leadership that sees
the problems you refer to, then the system is likely to fragment; the
only vote you have which counts is that you make with your feet, or a
U-haul. Some states and communities have more rational populations, as
seen in the crime and education statistics, and will be far more likely
to figure out how to manage their own resource base and infrastructure.

Some do not, and you can expect street gangs to turn into goon squads
that terrorize under the charismatic leadership of an aggressive alpha
male. Unless you are that male, you dont wanna be there.

Supply-side Economics Explained

George W. Bush's economic policy is based on trickle-down economics,
also known as supply-side stimulus. Reagan was a big fan of this idea
also. Simply described, supply siders argue that the best way to
stimulate the economy to grow is to cut taxes on the wealthy. When
their tax rates fall, the rich will increase their investments. For
example, a restaurant owner might decide to build a larger kitchen if
she gets a big refund check. Then, she'll have to hire more workers to
staff that kitchen, and so employment goes up, indirectly because of
that original tax cut.

It's a neat theory. Reagan argued that it even makes sense for the
government to cut taxes to below current spending and take on debt
because in the long run, the economy would grow back so that
eventually the tax cut would pay for itself. This approach is called
"supply-side" because the stimulus (the tax cut) are applied to the
suppliers of goods and services (the business sector).

The common objection to supply-side economics is that there's
absolutely no guarantee that if you cut taxes on the wealthy, then
they will use that money to invest in new business. In fact, since
these tax cuts happen in bad economic times, investors might decide
that their money is safer if they save it rather than invest it. Going
back to the restaurant example, if the restaurant owner decides to
just stuff that tax refund into a savings account, or just keep it in
her mattress, then no job growth occurs.

Also, if the government did what Reagan (and George W. Bush)
recommended and went into deficits to finance one of these tax cuts,
and no economic growth occurs, then the government is in a really bad
spot. They have to raise taxes back to sustainable levels, and then
raise taxes again in order to get the money to pay for the debt, and
then raise taxes even higher to pay for the interest on the debt. Or,
they can do what Reagan did, and just roll the debt over by issuing
more debt. This is sort of like paying off the Master Card bill with
the Visa. It works great as long as you can always get another credit
card to lend you more money. When the last credit card company decides
not to give you a card, then you are in trouble.

George Herbert Walker Bush called supply-side economics "voodoo
economics" because all of supply-side theory was based on a hope that
the rich would invest those tax cuts and not just stick them in the
bank. George W. Bush ignores his father's opinions about the wisdom of
his economic policy, however, and is a big supporter of supply-side
economics.

Third-world countries do the Visa-Master Card swap trick all the time.
They run up huge debts by spending more than they tax, and keep
borrowing money from private investors in their country and abroad.
When it becomes obvious that the country is so far in debt that they
will never be able to pay it back, investors start selling off their
debt, even if they sell them at steeply-discounted amounts. This is
really, really bad for the country still trying to pay its bills by
borrowing more. When investors start dumping your IOUs on the market,
then your country's currency quickly loses value. This is called hyper-
inflation.

In 1997, investors all around the world had lots of money invested in
east Asia. Then, people lost confidence in certain countries, and so
investors all started selling off like mad. The investors sold debt
denominated in Asian currency to buy dollars. This pushed down the
value of Asian currencies relative to $US. In short, families in these
countries found out that their life savings (which were stored in
their home-country currency, like the Thai baht, or the Indonesian
rupiah, not in $US) lost all of its value because of inflation. It was
as if these people woke up, went to the store, and discovered that all
the prices had doubled, and were probably going to double every day
after that. That's when the riots broke out, which scared away more
investors, and the downward spiral continued.

The same thing happened recently in Argentina. Investors all started
selling off Argentinian debt, so the value of the Argentinian currency
plummeted, and people were wiped out. Also, when you have high, high
inflation, goods imported from other countries become much more
expensive.

What happened in the 1980s is like a big Rorschach test. Some
economists see all the signs that supply-side economics worked, and
others see the same period as the beginning of severe fiscal
irresponsibility ("fiscal" means how the government manages spending).
There's no doubt the economy grew after the Reagan tax cuts, but it
never grew enough to pay back the debt Reagan racked up. We're
stilling paying interest today on that debt. We're also now adding to
it because each year that the government spends more than it taxes, it
creates a deficit, so that gets added to the debt, and we've been in a
deficit ever since the George W. Bush tax cuts. Also, in some other
recessions, the government has chosen to just wait it out, and most
recessions end in about 11 months. Based on previous experience, the
recession probably would have taken care of itself eventually, and we
wouldn't have all this debt hanging over us today from twenty years
ago that we still haven't paid off.

In 1991, part of the reason why George H. W. Bush had to break his
"read my lips: no new taxes" pledge was because he was forced with the
choice of either raising taxes, or putting the country further in
debt. He made the politically painful move in order to protect the
long-term interests of the country, even though he knew he was just
about guaranteeing he would lose the 1992 election.

Clinton saw an opportunity to steal an issue from the Republicans in
1992. Since they were no longer the party of being fiscally
responsible, Clinton made that his mantra. He balanced the budget
early, by cutting spending and raising taxes. Then of course, the
public didn't like that, so in 1994, the Democrats lost control of
Congress. Still, thanks to Clinton, we got out of deficits by the end
of 1990s and in 2000 Gore wanted to start paying down the debt, but
then George W. Bush won the election, and instead of paying down the
$7 trillion that we owe (about $24,000 per US citizen, and growing
every day), he pushed through his tax cuts instead.

The US debt is at an all-time high, and the financial world is
starting to worry about the long-term stability of the US economy. The
International Monetary Fund, in a release a few weeks ago, recently
warned that the US debt was increasing to the size where it could
threaten the world economy. The Bush administration almost entirely
ignored the report and the mainstream US media didn't make the report
into a big story.

Meanwhile, the US dollar has lost about 30% of its value versus the EU
Euro in the last 12 months. A weak currency in the short run may help
our exports, but in the long run, it pushes up interest rates and
frightens foreign investors. Since most of our debt is held by non-US
investors, the US government's ability to borrow depends on
maintaining confidence that our currency will maintain value in the
long-term.

One economist described debt as more like termites in the walls,
rather than a tornado outside. Both will eventually destroy the house,
but it is a lot easier to pretend that the termite problem isn't so
bad.

The Brookings Institute, a think tank in Washington, DC, just finished
a paper that describes some long-term consequences of ignoring the
budget deficits. Alice Rivlin, former vice-Chair of the Federal
Reserve Board of Governors co-authored the paper.It is written for the
interested outsider, rather than the professional economist. In short,
allowing the government to run deficits indefinitely raise interest
rates for all of us, risks inflation of US currency, and limits long-
term economic growth. Here's that paper.

Total employment (the number of people with jobs) has fallen by about
3 million jobs since the economy peaked in March of 2001. George W.
Bush promoted the tax cut as a tool to create jobs, and by that
standard, it hasn't worked at all.

http://www.kuro5hin.org/story/2004/1/22/164856/449