The
latest round of euro-jitters emphasizes the unimaginative contest
between the advocates of austerity and the quantitative easers. But
while the consequences of the application of alternative economic
measures are often unpredictable, the wellsprings of economic woes are
not usually hard to find. In the present problems, the same difficulties
afflict Europe and the United States, though in different degrees. It
is entirely inappropriate for the U.S. government, with its unspeakable
extravagance and anemic and fragile recovery, to lecture Europe or
anyone, except perhaps Zimbabwe and Argentina, about national economic
management.
The levels of social safety, ranging from a somewhat threadbare net in parts of the United States to a luxuriously upholstered hammock in France and parts of Scandinavia, were set when assumptions of birth rates and life expectancy were much different from the facts today. The sharp decline of the birth rate and heartening increase in life expectancy in all of these countries have ensured that, even without the increases in benefits against the electoral temptations of which our political classes have been resistless, all Western countries will go bankrupt without course corrections.
All human nature’s less commendable impulses seem to be accentuated and more frequently encountered in our politicians, perhaps inevitably when they depend on the endorsement of a plurality, and in this long-impending crisis we have seen all the obvious evasions of what is essentially a budgetary problem formulated in the terms of Grade Five arithmetic. First, there was the pretense that it wasn’t happening, and that the figures would reverse. How they would reverse, short of engaging in widespread, drumhead euthanasia, was never clear, and it didn’t happen. Then there was the expedient of immigration, which led to the Islamic threat in Europe and the abrasions of tens of millions of undocumented Latin Americans in the United States (a problem aggravated by inexplicable decisions to make the U.S. less accessible to its most assimilable, traditional, and objectively desirable sources of immigration, especially Europe).
Then, denial returned, and the problem was ignored and obscured by the perilous joys of inflation; debt and debt service grew and grew, the unmentioned, steroid-bloated monster in the room. Now, even U.S. student loans are a trillion dollars. Finally, in Europe, Eurofederalism and the common currency enabled the most fiscally weakened countries — Greece, Italy, Spain, and Portugal, which between them had not had a hard currency since Plato’s tetradrachma — to pile into the Euro on false prospectuses of the value of their assets and underlying currency strength. This was the providential exploitation of German chancellor Helmut Kohl’s desire for a “European Germany and not a German Europe.” He wanted Germany in a cocoon of friendly and grateful allied neighbors and to that end was prepared to have the Federal Republic’s pocket picked, starting by the impecunious East Germans, coming off 60 years of Nazi and Communist misrule.
Kohl’s successor, Gerhard Schroeder, slippery political opportunist though he often was (and he is now well-paid by Vladimir Putin’s nefarious regime), acted with great foresight and even courage by introducing drastic labor-market flexibility, incentivizing investments, and simplifying taxation. The result was the reduction of German unemployment from 10 to 5.5 percent. When it is impossible to lay people off, no one is hired. But while Germany was taking prudent measures in prosperous times, like the clever little pig building a brick house, the Europhoria of union caused European financial markets to succumb to the equivalent of Bovine Spongiform Encephalopathy (mad-cow disease), and for almost a decade accorded the same yield to Euro-denominated bonds, whether the issuing country is Greece or Germany.
And in lock-step and affecting solidarity with the astounding failures of judgment of European financial markets, the United States flooded the world with real-estate-backed investments, attested to be investment grade by the rating agencies and pushed by Wall Street, that were, in fact, worthless. (“Everyone has to dance,” including houses that were short-selling it out the back door in their own house accounts.) The political class locked arms from right to left to blame private-sector greed, and there was no shortage of that (there rarely is; they are in business to make money), but the original sin was with the Clinton and George W. Bush administrations, which ordered Fannie Mae and Freddie Mac to make 51 percent of their mortgage loans non-commercial, and legislated the same burden, at a 25 percent rate, on the country’s lending banks, while allowing merchant banks to borrow 30 times their equity but requiring them publicly to update asset values every month. It was, on the one side of the Atlantic as on the other, like encouraging hyperactive children to play with dynamite among the still-flaming fires of an open-hearth furnace. By the light of the resulting explosions, the whole over-indebted state of Western public finances, under-supported by enough employed, taxpaying, value-adding people, was exposed in its ghastly infirmity.
The United States has had enough of a cushion to afford a completely irresponsible fiscal game of chicken. Colossal deficits, largely financed by the Federal Reserve’s buying its parent’s (the Treasury’s) bonds, with the issuance of cyber-created notes, enable the country’s checks not to bounce, but these are — in all but name — just oceanic inundations of the money supply, while the administration has proposed tokenistic tax increases and has predicted a recovery that has not occurred. (It is all distressingly close to the well-traveled Ponzi neighborhood.) Any expense reductions are decried by the Democrats as an assault on the disadvantaged, and any tax increases are rejected by the Republicans as the straw that would break the back of the productive American camel.
The solution is in sight in Europe: Eurobonds will be issued in behalf of the distressed member countries if they adopt labor rules and tax policies that replicate Germany’s. Such policies may require more relief, but these steps will ultimately get more Europeans working and fewer on benefit, and favorably alter the balance between the contributors and the fiscal dead weight. Thus will a united Germany finally exercise its will in Western and Central Europe, to the relief of the neighboring countries Germany has frightened since the times of Frederick the Great, and, by some reckoning, since it faced the Roman Empire across the Rhine. With these reforms, Europe could then concentrate on the comparatively agreeable challenge of raising its birth rate, as all these ancient nationalities are beginning to circle the drain demographically.
In the U.S., President Obama and Speaker John Boehner showed some sign of compromise during the embarrassing deficit-reduction talks, but both soon faced revolt from their ranks. All now awaits the election. In the event of a Romney win, the Republican candidate’s background as a consultant could be a plus point, because what is required is, in fact, a compromise between an absolute refusal to raise any taxes, even when more than balanced by a preparedness to reduce others, and what amounts to an equally adamant refusal to cut spending. It is a stupid people’s game of chicken that should never have been played.
What is needed has been needed for the last four years: All the public-sector debt of all sources should be put into one mighty Consolidated Debt Obligation and turned into a sinking fund. All the entities contributing to the debt should proportionately contribute to the service and retirement of the debt, with each entity to decide how it will do so. The federal government should reduce personal and corporate income taxes sufficiently to generate a serious recovery, incentivizing investment to ensure that it isn’t just another consumer extravaganza. Taxes on elective luxury-goods sales and discretionary financial transactions, if assessed carefully, would easily exceed whatever revenue is lost in income taxes. Assisted by entitlement reform and extreme vigilance in curtailing future deficits, these measures would ensure that the sinking-fund obligations are met and shrink the deficit, absolutely and in reference to an economy of reviving growth.
The able-bodied, chronic unemployed can be put to work in conservation and infrastructure workfare projects, which would tie in with the gradual integration of undocumented immigrants, who should, at the right pay-scales, repatriate some of America’s lost manufacturing. Obamacare can benefit from the induced end of life so beloved of some of the current president’s closest allies, and will have to be replaced by an across-the-board attack on health-care costs, including a health-care tax credit, taxation of deluxe employee-health-care plans, imposed caps on some drug prices and malpractice awards, and probably, in place of the mandate, catastrophic-health-care insurance.
This will require leadership on a scale that has not been seen in the White House since Ronald Reagan, nor in the Congress since Sam Rayburn and Lyndon Johnson, but it will happen eventually. If the Europeans can do it, so can the Americans, and not doing this or something like it is an alternative that does not bear thinking about.
— Conrad Black is the author of Franklin Delano Roosevelt: Champion of Freedom, Richard M. Nixon: A Life in Full, and, just released, A Matter of Principle. He can be reached at cbletters@gmail.com.
