Introduction—The Ship of State

[T]hose people in Washington who write the complex tangle of rules by which the economy operates have, over the last twenty years, rigged the game—by design and default—to favor the privileged, the powerful and the influential. At the expense of everyone else.

Caught between the lawmakers in Washington and the deal-makers on Wall Street have been millions of American workers forced to move from jobs that once paid $15 an hour into jobs that now pay $7. If, that is, they aren’t already the victims of mass layoffs, production halts, shuttered factories and owners who enrich themselves by doing that damage and then walking away.

America: What Went Wrong?
Donald L. Barlett and James B. Steele
Universal Press Syndicate, April 1992

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About the Numbers

The numbers used throughout this book are from a variety of sources. Many of them are identified in the endnote references. Almanacs were very useful. If you enjoy horror stories, browse their sections on Business, Economics, Employment, Taxes and World Statistics. They document a world in financial chaos. Stephen King wishes he could scare people this much.

Efforts were made to assure that the figures used are correct, although absolute accuracy was usually unimportant. Numbers that show how a system might work came from the same place your math teachers got homework problems and legislators get the laws they pass—vivid imaginations.

About This Book

Every effort was made to provide accurate and authoritative information. All errors are the author’s and unintentional. This book is sold with the understanding that the publisher and author are not engaged in rendering legal, accounting, or other related professional services. Seek the services of a competent professional person if legal advice or other expert help is required.

Preface

Americans live in two worlds simultaneously. One is a world of happy illusions; the other is a world of sad realities. In both, 10% of the people own, control and consume 70% of the available wealth while the remaining 90% of the people who produce almost all of that wealth live on just 30%.

It’s just not fair. Why is there so much poverty in a world so rich?

Solving that paradox requires climbing a mountain of information. There are many paths up the mountain, some straight and easy, others crooked and obstructed with boulders. All of the paths are one-way. You may climb as high as your abilities will permit but you can never climb back down.

Each novice begins the journey at a different point but all seek the same destination: enlightenment.

Choose a guide or find your own path, travel alone or with others. Do not concern yourself with reaching the peak; no one ever has.

For some, the journey takes years. Rarely, an extremely gifted traveler will accomplish the task in just minutes. Such was the case for one novice upon hearing a partial list of the trail markers. His face suddenly lit up with comprehension and he exclaimed, “Oh, my God! It’s a whole new paradigm! Everything will be different but it will all be the same.”

His vision was accurate.

Once you understand exactly what he saw, you will have arrived at your destination.

Introduction—The Ship of State

An economic storm is rising. Soon crashing waves of payments due on the nation’s debt will sink the Ship of State. Even a cursory inspection of the rigging suggests more than a rough time ahead. The captain and officers offer only suggestions of shared sacrifice to weather the storm. Conventional economic navigators point out two nearby ports on the charts—one labeled Depression, the other, Hyperinflation. Neither sounds very inviting.

Fortunately for the passengers and crew, a third alternative exists. Unlike real storms on the high seas, artificial laws drive this approaching economic storm, not the immutable laws of nature. Change some fundamental rules and the size of this economic storm diminishes as if by magic.

The Current View

A revolution brews among disgruntled citizens, disappointed by political promises not kept and dissatisfied with national leaders apparently powerless to find non-sacrificial solutions to a host of America’s problems. Compelled to act by chronic deplorable social conditions, they are educating themselves on current political issues and assuming a larger role in public affairs.

Much of their education involves just two aspects of the nation’s troubles: the deficit and the debt.

The federal deficit is the amount of money that the government spends each year over and above its revenue receipts. In 1987, ‘88 and ‘89 the numbers average out to about $153 billion per year. By 1991 it was $269.49 billion and still climbing. So much for the Gramm-Rudman-Hollings Act. This amiable piece of cost-cutting legislation, actually entitled the Balanced Budget and Emergency Deficit Control Act of 1985, mandated an annual deficit reduction for each of the following five fiscal years and projected a deficit target of zero in 1991.

Congress revised the projections in 1987 and again in 1990, then setting the deficit target for 1992 at $317 billion. Announcing a landing at $27 billion below the target soothes the nerves of paying passengers better than explaining spending excesses of $269 billion above the mark. These lawyer-legislators know how to run a ship—when you can’t make the scheduled port on time, change the destination. Most of the American people, not being C-Span junkies, never catch on to the maneuver. Even so, members of Congress felt the water rising—three attempts at deficit reduction and each time the deficit increases. A very frustrated Senator Warren Rudman of New Hampshire, predicting that the dollar would be worthless by 1997, announced that he would not seek reelection. Smart rats abandon a Ship of State sinking in a sea of debt at the earliest opportunity.

Years of accumulated deficit spending make up the national debt, about $4 trillion in 1992 ($8.18 trillion, November, 2004). That’s 4,000,000,000,000 dollars. The yearly interest on that amount of debt calculated at 6 percent is $240 billion. Harry E. Figgie, Jr., made the point in Bankruptcy 1995 that by then “interest on the national debt is likely to become the largest item in the federal budget, topping the enormous Pentagon and Social Security budgets. In a few short years, the government will have to spend more to make its interest payments than it will collect in taxes, and in that year America will enter an age of financial disaster that will dwarf the Great Depression and hail the end of the United States as we now know it.”

The Omnibus Budget Reconciliation Act of 1993 (HR2264, PL 10366) passed by Congressional Democrats, with some Republican help, and signed on August 10 by President Clinton was another failed attempt at permanent deficit control. By their own figures, deficits would remain at an average of near $200 billion per year for five more years, pushing the national debt $1 trillion higher. And, according to opponents, this occurred simultaneously with the largest money grab—that is, unconstitutional retroactive tax increase—in the nation’s history. One must admit the scheme displayed a certain crude resourcefulness: If you never intended to pay off any portion of the $4 trillion national debt, you might as well plan on not paying off $5 trillion.

Chart I

Five years later, right on schedule, annual national deficits were becoming surpluses, driven by a dot.com boom, the Republican Contract With America cap placed on spending on social programs and unexpected low interest rates which decreased the government’s total interest payments even as its debt climbed.

Chart II

Between 1997 and 2001 the total portion of national debt held by the public decreased by $562.3 billion, a cause for celebration and backslapping among Washington politicians. Little noticed and less remarked, during this same period the Federal Reserve System debt increased by $109.6 billion and the debt held by the Federal Government, meaning money taken from Social Security and replaced with a government IOU, increased by $853.4 billion. Gross Federal Debt actually climbed by $400.7 billion.

Those economists addicted to studying tables and graphs couldn’t help but recognize that the $562.3 billion of debt supposedly paid was offset by the increased debt of the Federal Reserve System combined with the increased debt held by the Federal Government. Such observations provided ample grapeshot for academic cannons but were overlooked by the mass media and the public.

Notice the futuristic nature of all deficit reduction plans—either holding the line on deficit increases or a projected annual deficit decrease for some period, usually five or more years, followed by a guarantee of better days to come. The debt always remains and, in most cases, increases. It turns out that the $8.18 trillion national debt most everybody willfully ignores is only the tip of the iceberg.

In May, 2003, Peronet Despeignes, in a front-page article for Britain’s Financial Times, reported that the G. W. Bush administration buried a report commissioned by Treasury Secretary Paul O’Neill to study the future impact of retiring Baby Boomers’ pension and healthcare needs. According to the article, the report, authored by Jagadeesh Gokhale, a senior economic advisor with the Federal Reserve Bank of Cleveland, and Kent Smetters, a former Treasury deputy assistant secretary for policy coordination, cautioned that the U.S. government faced a long-term budget deficit of more than $44 trillion and recommended an “immediate and permanent” across-the-board tax increase of 66 percent.

Two days later White House Budget Director Mitch Daniels stated that the report was not suppressed. O’Neill resigned in December, succeeded by John Snow and the report was left out of February’s budget report as the White House lobbied for $350 billion in tax cuts.

That off-budget $44 trillion, government guarantees for private pension programs, banks, S&Ls and for un-funded actuarial liabilities in Civil Service, military, Congressional, Social Security, and other federal retirement systems due over the next 50 years was somehow lost in all the ballyhoo. It was never questioned. Combined with the on-budget debt the total exceeded $50 trillion.

Chart III

Now for the good news: Government promises require no interest payments; some of that $50 trillion supports solid projects not likely to need taxpayer bailout, and most of the $50 trillion that must be paid is not due tomorrow.

Feeling better? Don’t get too comfortable. Paying off $50 trillion over a period of fifty years, even without interest payments, still amounts to $1 trillion per year. Where is your share? If you are one of 100 million people on the paying side of the ledger, you owe an additional tax of $10,000 per year for the next fifty years. Perhaps you planned to be on the receiving side of the ledger? Better keep a life jacket handy.

In the conventional view, paying a debt requires a surplus. The existing political climate admits to no real surplus. Historically, the Democrats routinely fail in producing or loading Ship’s cargo. Their talent seems to reside more in distribution or promises of distribution once the Ship docks. The 1992 pre-election budget plan offered by the Republicans, under the leadership of then-President George H. Bush, projected annual deficits averaging about $250 billion for the next five years, only marginally better than the Democrats’ pre-election budget plan.

Of the viable candidates, only H. Ross Perot offered a believable deficit reduction plan with even the possibility of producing a surplus. Though not a professional lawyer-politician, his scheme offered little more than their same tired old solution of shared sacrifice, of shifting small percentages around on the budget charts, 2% here and 5% there. It was a better plan, but it too would have failed. There are no conventional solutions to a $50 trillion national debt problem.

The ‘96 campaign sang the same song, second verse. Perot stressed deficit and debt and, even with his creditability in the toilet, forced Bob Dole and President Clinton to pay politically correct lip-service to the subject. Both made the usual political promises. Rational true-believers were not to be found.

Widespread earnest concern was a short-lived manifestation. Keeping the Ship of State afloat requires happy thoughts: America has the world’s largest economy. Or America is the world’s only superpower.

Face it. No amount of sweat or tears solves this problem. The water is chest deep now and still rising. At this point keeping your head above water requires brains not brawn. We either think our way out of this predicament or launch the lifeboats; no other choices exist.

Eliminating the Debt

Bill Clinton posted the wrong campaign sign in his ‘92 headquarters. The corrected version would have read “It’s the debt, stupid!”

Think about it—with no national debt few people would complain about deficit spending, even at a rate of several hundred billion dollars per year over a period of several years. Does this sound like an outlandish hypothetical idea? No, it’s historical fact.

The Office of Management and Budget historical record for the Budget of the United States Government, Table I, shows that between 1961 and 1997 the federal government operated on the deficit side of the ledger in every year but one. During this time Richard Nixon posted the only surplus, $14.5 billion in 1969, his first year as president. Deficits reigned over a generation.

Deficits originate in fiscal policy, the technical name for a nation’s yearly budget. The federal government, through manipulation of its taxation and expenditures, tries to maintain a thriving economy with low rates of inflation and often simply spends more money than it receives in revenue. This is an easy course to follow because more people now work for government than work for industry. Reversing course always proves difficult. With needs so great, it makes little sense to cut jobs, even nonproductive government jobs, by suddenly adopting a conservative economic policy. In the near term, throwing more people overboard only increases the demand for government services.

The traditional solution of tax and spend, a strategy often attributed to the Democratic Party, makes circumstances worse. Recent history shows that raising taxes generates less revenue and encourages more government spending. In theory, the rich pay the tax and the government spends the money for new programs to alleviate the problems. In reality, the tax falls on everyone and the new government programs amount to full speed ahead on the same irresponsible fiscal course. The Ship of State sinks ever deeper into a sea of debt.

In these situations governments sometimes finance their debt through monetary policy. This amounts to little more than using their authority to print additional paper money, the currency now used almost universally as a medium of exchange. The government’s treasury sells the public debt, in the form of its own commercial paper, to the nation’s central bank. Under political pressure, the central bank—in the United States, the Federal Reserve System—abdicates its monetary responsibility to control the availability of money, interest rates and credit. It accepts the government’s IOUs and pays with a check on itself against no funds.

Office of Management and Budget
Table I—Historical Data, Billions

Note: 2005 and 2006 are estimates.

That check, passing through the nation’s commercial banks, increases the total amount of currency in circulation without an offsetting increase in wealth. Moderate amounts of this action induce inflation; gross amounts result in hyperinflation, a condition where inflation proceeds at rates higher than 50 percent per month.

Choose payment or default—debt reduction is inevitable. Hyperinflation has the aesthetic appearance of paying off the debt in dollar terms. Virtually worthless checks arrive on time as promised. At first debtors seem favored over creditors but eventually an economic slump spreads the pain to everyone.

Fiscal responsibility dictates a substantial increase in taxes and drastic cuts in government programs. But cutting those government programs in which most of the debt lies amounts to default, and increasing taxes reduces productivity, again leaving only the pain of sacrifice to be shared.

Select either course and the manifest destiny of at least two generations of Americans becomes diminished expectations. The Ship’s captain and officers try first one heading and then another, frantically searching for a compromise between the two. Meanwhile, bad weather steadily gets worse.

An Alternate Solution

When conventional solutions prove unworkable, consider other actions. The passengers and some members of the crew might seize the Ship of State and plot another course, one that goes around the storm. Mutiny? The response is extreme but mutiny may be too strong a word considering that the passengers own both the Ship and its cargo. Reflecting on the situation, it was just such radical action by the Founding Fathers that initially launched the Ship.

Forget deficit reduction and fiscal responsibility for a minute. Suppose that a method could be devised to attack the nation’s debt problem directly. And let’s further suppose that this plan has desirable byproducts: a tremendous increase in national wealth that elevates everyone’s standard of living, a moderate reduction in the need for government to provide the public goods and services, and a shift in the public’s perception of its relationship to the government, a shift that might soon force government officials to resume a responsible course. Achieve these goals and deficits become surpluses. While there is no guarantee that the lawyer-politicians will exercise future fiscal restraint, since they can always make more promises and spend more money, under this plan the possibility at least exists.

This thesis acknowledges an impending debt crisis but argues that its primary cause is philosophical, not technical error. On the other hand, the proposed solution is purely technical, derived from systems theory. Its foundation rests in part on correcting philosophical error and in part on anticipated public response.