Friday, March 24, 2006

Can Austerity Measures be Avoided?

Commentary by Martin Kelly
December 1, 2004

The spectre of austerity measures, wages and prices controls, restricted working weeks and gas rationing, is floating above the American economy, an elephant in the room that the White House and Congress refuse to acknowledge. It is in possibly the deepest trouble it’s been in since the Wall Street Crash, a fully avoidable crisis into which its custodians have sleepwalked because of their refusal to face basic economic realities. The malaise of the Carter years happened in a very much smaller economic environment than the Bush one; the Bush malaise in on a truly global scale. When it all falls down, 1929 will look like a picnic.

President Bush seems to believe that he can deliver stability while massively increasing public spending; while cutting taxes; while presiding over the erosion of industrial capacity; while refusing to impose any form of meaningful import controls; while refusing to curb illegal immigration; while fighting a war.

Memo to the White House – IT’S NOT WORKING!

At the moment, the only way this policy can be sustained is by printing dollars for the central banks of the Far East to buy at the rate of nearly $2 billion every single day. These countries do not see themselves as America’s partners, but as adversaries -China has doubled its energy imports in five years. It is imported energy that is now fuelling their boom, and they compete with America for access to these resources, while at the same time keeping the dollar afloat because they need it to be at an artificially low level to keep their exports competitive - they keep their own currency pegged to the dollar. Other countries are losing faith in the buck – the Russian central bank recently decided to switch some of its holdings from dollars to euros.

People look to Alan Greenspan to protect their homes and savings, when his ability to safeguard the economy is restricted solely to the issue of interest rates. Although his track record as a central banker is superb, in a truly global economy he is less powerful than people imagine.

But even now, there is hope. There is a very simple six-point plan that the president could follow if he is interested in not just maintaining America’s global economic dominance, but more profoundly, avoiding the inevitable outcome of such reckless policy, the bread line.

Kill 95% of all government programs now.

Government is the most wasteful economic activity ever devised. Its functions should be limited – secure the borders, fund a militia, keep the highways clean and passable, make sure the mail’s delivered on time and ensure that the living standards of the citizens are not jeopardised by your activities. There is little else for a government to do.

Masking the activities of government by outsourcing to the private sector does not diminish its scale; it only moves the problem off the central balance sheet, not out of the deficit. Only by killing all unnecessary programs, probably best defined as any program or arm of government that has not been specifically constitutionally mandated, will the US budget deficit be reduced. There is no moral, economic or conservative justification for a Republican President and a Republican Congress to continue to spend other citizens’ money on their pet projects, when the only means of reducing the resulting deficit will be levying more taxes on those citizens further down the line.

They have taken to themselves the right to tax – since when did they have the right to waste?

This policy would put a lot of civil servants out of work. From experience, putting people out of work is always an ugly business, but in some cases it’s necessary. This is one of them.

Take back the dollar

If China ever decides to break the currency tie, which they will do when it suits them, the dollar will sink like a stone. One of the major causes of deficits is the ready availability of easy money – if you make more money available, the thinking goes, more people will buy it. It’s a great theory, until you print too much money, hyperinflation kicks in and the price of a pound of potatoes creeps up to $70.

China doesn’t need any more dollars – don’t give them an excuse to buy any.

Fundamental reform of the tax code

All taxation is fundamentally penal. It is pure brute force, taking money away from people who have earned it because you want it for something else, while backing your actions with the force of law and calling its payment a civic duty.

The President’s tax reforms over the period of his first administration were not designed to help the vast majority of taxpayers. His supporters always argue that the ultra-rich pay a higher share of taxes, but it does not matter if they contribute 30% or 40% of the total tax take – those out with their bracket will still pay the remaining 60% or 70%. The less wealthy and the steadily diminishing middle class are now subsidising those who benefited from the first round of tax cuts.

Any proposal for tax reform must include these provisions; abolition of all stamp duties; abolition of any capital gains taxes; abolition of inheritance taxes; abolition of tax breaks for importers; abolition of corporation taxes, with severe penalties to be imposed against corporations who do not reduce their prices to reflect the nil-tax rate; and the implementation of a flat income tax rate of 18%, diminishing over five years to a rate of 1% across the board for all taxpayers, with the resulting shortfall being made good by equivalent increases over the same period in

The Tariff

The purpose of a tariff is to discourage imports while encouraging domestic production and generating revenue for small government.

The USA is now running probably the highest trade deficit of any nation in history. Not even the Roman Empire bought so much stuff. It is a testament to America’s strength that its economy has not already buckled. The very fact that it has not gives the protectionist cause for optimism – if it wasn’t so strong, why would they want to export there?

This means there has never been a better opportunity for America to take positive advantage of the world’s desire to sell it stuff.

A tariff would relieve the burden of taxation on the people who work the longest hours, and who individually work more jobs, for the shortest vacations, of any people in the developed world.

Deviousness and low cunning are not natural conservative traits. They are natural neoconservative traits, based on the entryism of their godfathers Trotsky and Shachtman, all veiled in the obscurantism of Leo Strauss. Unfortunately, classical conservatives may now need to show the same level of low cunning in order to beat the corporate interests who would oppose any tariff down to their stockholders’ last dime.

A tariff should be more than just a dollars and cents levy on the naked price of imports. If a foreign government wants intellectual property transferred to a subsidiary in their country, as the Chinese demand, then they pay extra. If they want lobbying for their imports as part of the deal to allow the building of factories on their turf, as the Chinese demand, then they pay extra.

The principal destination of outsourced white-collar jobs is India. While the USA has a hard-won culture of civil liberties, Indian culture still maintains a caste system whereby citizens are systematically excluded from opportunity due to the circumstances of their birth. If a corporation wishes to outsource a service to India, then, as well as any tariff payable on the re-imported service, they should be fined if they do not insist that the same rules on equal opportunities apply on sites in India as in America.

Trade is not a right – it has costs on all sides. One consequence would be that those who demand to trade with America would have to pay for more than just the privilege of trade. For example, nations like South Korea have long enjoyed the right to trade almost freely with the USA, while also enjoying America’s military protection at little or no cost. A tariff would mean that they could still trade – but the tariffs they pay would be funding the military, instead of the entire burden falling in the good folks in Nebraska.

Penalise outsourcing to a point where it becomes uneconomic

I once suggested an 85% flat tax be levied on outsourced goods and services. Given the imminent decline of the dollar if current conditions continue, that bar was too low – a figure of between 95% and 99% is probably more realistic.

Outsourcing does not grow economies; it kills them. It shifts economic advantage from personal to corporate interests, increasing profit for a few without any broader return. In an economy that needs personal taxes in order to function, like the USA at the moment, it destabilises the country by diminishing the tax base.

Lay-offs used to happen only when companies weren’t doing well, and in those cases most conservatives would agree that lay-offs would be regrettable but necessary – the business owners who bore the economic risk had a right to minimise that risk. However, modern outsourcing means that people are now being laid off when businesses are doing well – it is nothing but a means of reducing payroll costs to increase profits. Such behaviour, such reckless pursuit of profit at the expense of another man and his family’s security, is not conservative.

Some people, like the neoconservatives, say this process is unstoppable, due to the genuinely global nature of economic activity, and that markets will always seek their lowest cost, be it in India or Indiana. There are some in that camp who argue that to say otherwise is battling history. On the other hand, there are neos who used to say that they stood athwart history, shouting ‘Stop!’ Maybe they are the ones who don’t understand history. Classical conservatives should know rather better.

Repatriate all illegal immigrants and jail those who hire them

Pace Frosty Wooldridge, illegal immigration’s most pernicious effect is the driving down of wages. Wages would not be driven down if employers did not hire illegals. Hiring illegals in place of Americans is not quite economic treason, but it comes very close.

Too many countries in the Americas rely on the American earnings of illegals as part of their GDP. Illegals’ earnings are 14% of El Salvador’s economy. It’s got to stop. If that means higher prices in the shops, then that’s a necessary sacrifice that has to be made until the economic imbalance is corrected.

To put it another way – is it more preferable to pay three cents more for a sack of carrots picked by a guy with a Social Security number, or four cents more for a bag of oranges, than to pay two cents more in tax on every dollar you earn because of the demands of illegal immigrants on public services?

One troubling question for conservatives is the issue of regulation. Under certain circumstances, it is perfectly conservative to regulate. The White House and Congress should be actively lobbied to promote a bill creating the federal strict liability offence of ‘corporate economic sabotage’. CES would supercede all other legislation on illegal immigration and would occur wherever any corporation, partnership or sole trader hires an illegal immigrant. It would be an offence that is very easy to prove, and should be backed up by fines of up to one year’s turnover, not profits, and federal jail time of up to seven years for any executive responsible for a second offence. If an executive is found guilty in two different corporations, then the first offence should aggravate the second.

Illegal immigration should stop just about overnight.

The purpose of this program, which would contain its fair share of pain for some folks, would be to preserve the wonderful thing that is the powerhouse economy of the United States of America, without the need for austerity measures. It can still be done, and, given current conditions, it should be preferable to the other perfectly possible alternatives that might apply in two years time – a run on the banks; hyperinflation; mass unemployment; banks handing out mortgages on street corners to generate business. This is a way to hold back the storm, because it’s not looking good.