Social Insecurity

The ENRON Corporation was supposed to be an energy company, supplying the nation, in creative ways with the energy we need to heat our homes and cook our food. As it turns out, most of their creative energies went into cooking the books. Thousands of workers and investors saw their fortunes and their pensions wiped out, while the nation heaped well-deserved scorn on the perpetrators. However, the accounting chicanery of ENRON is small beer compared to the accounting trickery practiced by the federal govmint.

It is sad enough that the President can “boast” that he has reduced this year's deficit to a mere $163 billion. Alas, even this boast is a lie. But in truth, the real deficit is a staggering $497 billion. Nearly half a trillion dollars. How is this done? Scott Burns in Sunday's Dallas Morning News puts it this way:

The September statement shows that the "on-budget" ran a deficit of $344.3 billion in fiscal 2007. The "off-budget" ran a surplus of $181.5 billion. (The off-budget is dominated by Social Security, Medicare and other programs with trust funds.) Add the two figures and you get the "unified budget," that $162.8 billion.

But that's only part of the story.

In the last eight years, we've had two years of reported surpluses and six years of reported deficits. Altogether, the total reported deficit has run $1.3 trillion. But if you examine another figure – gross federal debt – you'll see something strange. First, it has increased in each of the last eight years, even though in two of the years surpluses were reported. Second, gross federal debt (which includes the obligations held by the Social Security and Medicare trust funds) has increased much faster than the deficits – $3.3 trillion over the same eight-year period.

That's $2 trillion more than the reported $1.3 trillion in deficits over the period.

How do they manage to under-report the deficit by $2 trillion? That's easy (Ken Lay would have been proud of this trick): they credit the various Social Security and Medicare “Trust Funds” with interest payments that aren't actually paid. Instead, they just place “non-marketable” securities in the funds. The budget therefore doesn't take a hit, while the Trust Funds show an accounting increase, even though no money is received. Thus they can perpetuate the fiction that Social Security is “sound” for the next 34 years; in fact, it will run out of cash in six to nine years. Indeed, the disability fund has been running at a cash loss since 2005 and Medicare part A (The Hospital Fund) ran out of cash this year.

I am not (for once) blaming George Bush alone for this deception. Clinton, the elder Bush, and Ronald Reagan all engaged in the same chicanery. It began on Reagan's watch with the “voodoo economics” of the Laffer Curve. That famous, and famously discredited, curve was supposed to raise revenues by lowering taxes. But, according to a report by the Treasury Department, it was a dismal failure. Reagan had to scramble to raise revenues, and tinkered with the tax laws nearly every year (this was before the Chinese government decided to simply lend us whatever amount we wanted—too bad for Ken Lay that he wasn't on better terms with the Chinese). The most lucrative source of new income was raising the Social Security taxes by 25%. No doubt such a move could be justified, if the SS funds really got the money, which they didn't; it was merely used to cover the big losses from “supply-side” economics.

Next year, the first wave of post-war baby-boomers will be eligible for early retirement, and for full benefits within four more years. The next president will not have the use of the trust funds to balance the budget; in fact, they will be a big source of imbalance, as the general revenue funds will have to pay out actual cash to retirees, just as retirees had paid actual cash to make the deficits look smaller. The worthless paper in the Trust Funds can only be redeemed by increasing taxes, lowering expenses, inflating the currency, or by a combination of all of the above. Or it can simply default.

My guess is that the government will not be able to meet its obligations; it will have to default on its debt. This default can take one of two forms: the government can default to public and foreign holders of its debt, or it can default on the debt held by the trust funds. I suspect it will do the latter, since some of the foreign governments holding the debt are great powers who don't like being cheated. So we will cheat our own people. What else is new? Mind you, I am not totally opposed to some adjustment. I am 60 years old, and it seems incredible to me that someone as young and as good-looking as I am (that's my story, and I'm sticking to it) will be too old to work in a mere five years. I wouldn't mind working a few years more to help relieve my children of an intolerable tax burden. But I don't think that even that will help. We have played by the rules of voodoo economics for too long, and we are about to conjure up a fiscal demon.

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DEVVY KIDD AND THE DOLLAR’S DOLDRUMS

In times past, the Review linked to the excellent columns of Devvy Kidd, author and Constitutional activist. She does again in her current column, posted on the opinion website NewsWithViews.com, called “Got Bling?”

She notes that the recent Federal Reserve Board’s cut of interest rates will not really help the average American that much. With said average American drowning under personal and corporate debt, scrambling for extra money to keep poverty and starvation away from their door, they don’t understand the ins and outs of our monetary system. Prices for staples are rising, like in so many other countries, from bread to milk to oil and gasoline.

And with the recent rush on the English bank Northern Rock fresh in their minds, folks wonder if the same thing will also happen to them in the US.

As Ms. Kidd notes, hard times are coming. With the dollar still losing value against the Euro and the British Pound, costs for basic foodstuffs will continue to rise.

What to do? In the long run, it is up to us who know about Distributism to promote it in our neighborhoods. Explain it to all who will listen. Then get them to act on what they learn in their own neighborhoods. Change local policies that crush the small business and co-operative sectors, especially in taxes and regulations. Begin local farmer-consumer co-ops in your neighborhoods. Begin plans to introduce local currencies to keep local economies going, like what’s being done in the Berkshires of Massachusetts and in Ithaca, NY. Flood Congress with letters and calls to demand reduction of tax burdens on the majority.

In short, Distributism is the way out of our national dilemma that Ms. Kidd so aptly warns us of. Let’s get to work - and prayer - and clean up the mess. Bravo to you, Ms. Kidd.

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Nine Zeros (and Counting)

Astute readers will note that the National Debt Clock has passed the $9,000,000,000,000 level. That's Nine Trillion Dollars of debt.

And it is understated. Our real debts include all the money held by foreigners (we need $2 Billion from them each and every day just to balance our trade accounts), obligations to medicare and social security, and God knows what else the govmint is hiding.

Of course, there is no way to pay all of this money. The only real way to wealth is work; you must produce products that are good and useful and marketable. But we are losing our ability to make things; we are outsourcing our manufacturing to foreign lands, because we have confused financial profits with real profits.

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I Owe, I Owe, It's Off to Work I Go

I could go on and on about the purely economic evils of a nation that lives in debt, and I probably will in future posts. But there is a more serious issue. Debt is not just an economic question, but a moral one. And a moral fault is always a kind of enslavement. Sometimes, we must live beyond our means, because our work does not provide us with reasonable means to live, or because we can't find work at all. But that does not seem to be the cause of most debt today. Rather, most consumer debt today reflects our status as consumers; we identify ourselves not by what we are, but by what we have; identity has become a matter of having rather than being.

This is a kind of slavery. Americans work more than anyone else because we owe more. It is not the so-called "Protestant Ethic" that keeps us chained to our desks, but rather its break-down. Our forebears might have gone into debt for a few long-lived items: a house (purchased with a heavy down payment), a car, a piano, a little furniture. But the idea of putting a burger on the tab would have struck them as strange; the idea that they would be paying next year for a shirt they threw away yesterday would have struck them as bizarre.

In order to become a nation of debtors, we had to change our moral views; we had to acquire a sense of entitlement, and one that operated immediately: we cannot wait for what we want; all our desires must be filled this moment. But when we do this, we lose some degree of freedom. We work now not merely to get the things we need, but to pay for things we probably didn't need; in other words, we work for Mastercard; we labor for Visa. And Mastercard and Visa can never have enough of our work. If a man is working to get what he needs, the things he needs send him a signal as to when to stop working; but a man of unlimited desires, desires he largely gets from advertising, doesn't know when to stop working. Soon he does not own the things he bought with borrowed money; they own him.

Individuals and families go bankrupt for a variety of reasons; sometimes because they are spendthrifts, but other times there is illness, job loss, tragedy of some kind. But with nations, it is otherwise; before they lose their freedom they lose their character. Moral bankruptcy is the prelude to, and cause of, financial bankruptcy.

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A House of Cards?

The Fed reported yesterday that consumer credit rose 6.4% in May, the biggest increase in credit card debt in six months. Why are so many people turning to the tab to finance their lives?

One could cite a variety of reasons: convenience, consumerism, materialism, and so forth. But there is a darker truth. Even without all of these other things, our economy would still require vast sums of credit to keep the average household afloat, and the economy with it. The problem is the vast inequality in pay and wealth. When wealth concentrates at the top, then there is simply not enough purchasing power in the mass of men and women to clear the markets of all the goods that are produced. This purchasing power has to be re-cycled in some way, or consumer markets will simply fail, and with it, the economy. The major way of re-cycling purchasing power has come to be consumer credit.

However, such credit is a trap. It does save the economy from short-term distress, but only at the expense of guaranteeing its eventual collapse. We can increase demand by a borrowed dollar today only be decreasing demand by that same dollar--plus interest--tomorrow. And the interest rates are, as everyone knows, astounding. This has two effects. first, it further concentrates income and wealth at the top, which in turn necessitates an ever-greater influx of lending to the middle and lower income groups, which further concentrates wealth at the top, etc., leading to a vicious cycle,

The second effect is that consumer credit competes with the capital available for business expansion--for the creation of new jobs and products. Think about it: would you rather lend to a business that will return 10% on your money, or to a consumer who will pay 15%, 20%, 25% or even more? Thus the supply of capital is limited by the need to finance consumption.

An economy built on consumer credit (which in more sensible ages was called "usury") may appear to be strong, but in fact it is, quite literally, a house of cards--credit cards. All the statistics about the health of the economy are meaningless if they do not offset for the amount of activity financed by non-productive debt (i.e., consumer credit). This is simply a matter of proper accounting; one has to show not just the assets, but the liabilities as well. And anybody whose books do not show the liabilities is living in a dream world and heading for a fall.

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