Sclerotic America

A recent article in the New York Times reviews the dire straits of America’s Medicare and Social Security funding, with insolvency scheduled for 2017 and 2037, respectively. Piled on top of this is the question of how to fund broader public health care, with the apparently intractable problems of worsening demographics, inexorable rises in health care costs, the contradictory claims of restitution for malpractice and keeping insurance costs under control, and the varied and vociferous interests of the insurance companies, HMOs, corporate health plans, Big Pharma, doctors and nurses. But this impossible tangle – a conflation of the hydra and the Gordian knot – is just one of America’s many problems.

Immigration is just as bad: an impoverished population of about 100 million in Mexico and Central America, desperate to get in; a permeable border which cannot be controlled; the domestic cluster of a Latino voting block, left-leaning Dems, nativist Republicans, low-wage workers under never-ending pressure from even lower-wage illegals, the immigration bureaucracy, employers in meat-packing, fruit-picking and other low-margin businesses relentlessly seeking to cut costs even further, high-income earners (even in the upper reaches of government or progressive academia) who need cheap nannies and affordable domestic staff.

And then there’s crime. And prisons. Homeland Security. The insoluble problems of the underclass. Infrastructure, already underfunded by many years and trillions of dollars. Education, with its stagnant test scores, rising international competition, intransigent teacher’s unions, millions of kids with issues, millions of kids on pills, millions of kids who don’t want to be anywhere near a class room; no viable approaches to dealing with disruptive behavioural problems in class; a totally polarized debate about charter schools.

And the War on Drugs. A failure, to which the alternative is most likely just a different kind failure. The underlying issue is that America has, in spots at least, a deeply-rooted drug culture. As with guns, homicide and prison population, so with recreational drug consumption: the US is just running away from the rest of the developed world. While decriminalizing pot might be a sensible palliative option, for full effect complete legalization, including taxation, would be required; otherwise organized crime will retain the revenues. The question of what to do about crack, smack and crank is well beyond anything any elected official will even consider mentioning. The problem is that if there are enough people in the habit of taking these substances to be a problem, well, then you’ve got a problem . . .

Energy and the green economy. Holy. Switching the power consumption habits of a third of a billion people. Running mass transit on a suburban and exurban network built for the car. Nuclear liability insurance. Nuclear waste and NIMBY. Clean coal. Wind farms. Cutting CO2 while a certain large, well-known Asian nation roars ahead and sucks up even more manufacturing capacity. How to stop funding the gallery of quasi-criminal states (well, excluding Canada) who supply the oil; without making it even cheaper for foreign competitors, specifically aforesaid large country in Asia with extensive manufacturing capacity. Toss on expanding debts, bankrupt states, trillion-dollar deficits for as far as the political cycle can see. The military budget. Tort reform. The uncontrollably metastasizing tax code. Regulation. Banks right now are struggling with waves of mortgage refinancings and having to hire new staff to cope with the enormous amounts of paperwork for what should be an elementary financial transaction. Waves of financial regulation to come and armies of bureaucrats and bankocrats to implement them. Regulators for “systemic” financial risk. It might be unmeasurable, or even undefinable, but that doesn’t mean we can’t get our people on it. Lots of them. A 25-year expansion of credit, which has ended with financial sector debt standing at about 120% of GDP, compared to 20% in 1980. Overlevered governments, corporations and individuals who will need many years to delever their balance sheets, if in fact they ever do.

Which means, finally, that the robust growth which kept the system oiled over the last two decades is likely to dry up. No more consumers to keep it going. And without the extraordinary economic vitality which has hitherto covered up the multitude of its sins, America is suddenly going to start looking a lot less attractive. Some commentators have compared the US to GM – dynamic in youth, still robust in middle age, but finally overtaken by the sum of its misjudgments and all at once old, frail and perhaps incurably sclerotic. From California, arguably the quintessence of America, the rumour is that governor Schwarzenegger has grown sick of politics and can’t wait to get out, evidently recognizing that the tectonic gridlock is far beyond the power of a mere gubernator to affect in the slightest. America has deep and serious issues, a mass of politically intractable problems whose significance has been grossly underestimated during the long boom of the last two decades. As Jack Rebney would have it: no more.

Hope springs

Green shoots sprouting through the rubble. No, not the economy, which is doing fine already; in fact, it's looking like the whole crisis thing was just a false alarm and we'll be back to a full-on boom by the summer. But to see somebody in politics, a conservative, no less, actually advancing conservative economic policies - that really is different. So props to Christine Elliott for promising a flat income tax for Ontario. There are three good reasons to support this. First, it simplifies the tax system, which is always a good thing. Second, it lowers the disincentive to be more productive. Third, and most importantly, it represents a commitment to honesty and accountability in public finances.

The political problem with "progressive" taxation, aside from the sheer perversity of punishing the most productive members of society with an extra marginal tax burden, is that it allows government to expand services for lower income voters by slapping an extra tax on the high-income minority. "Lower income" in this case can mean the bottom 75 or 80 percent of the population if the tax increase is applied only at the top level. Most voters therefore face the trade-off of increased public spending on the one hand and on the other a cost to them of . . . nothing. Who wouldn't go for that?

A flat tax, by contrast restores accountability to public decision-making. Voters who want more swimming pools, buses, hospitals or whatever can have them - but they actually have to pay up. Yikes. Yes, the flat tax as proposed by Elliott adheres to the usual meaning of the term - that is, it is a flat rate after a basic exemption (in this case 8% on income over $18K), so not a pure flat tax; but it shifts the fulcrum. Instead of trying to crowbar more money out of the top earners (who are also the top producers) most taxpayers would be facing some level of tax increase if the flat rate went up. More spending would mean more tax - for almost everybody, which is the point.

Most Canadians like their public services. Unfortunately, not everyone is completely forthright about facing up to their fiscal responsibilities. We like to push the weight off onto somebody else - onto Ontario, Alberta, Toronto, the oil industry, the banks, other corporations, commercial property, the rich in general. While utterly inconsequential instances of venality like Adscam envelopes or MPs padded travel allowances never fail to raise the national gorge, the gross political corruption of our tax system, the bloated hippo in the room, parades about in the open without attracting any notice at all. The GST - an honest tax which everyone is expected to pay (even though there is almost no one who won't try to duck it if they think they can get away with it) - is, by the same token, reviled.

Of course, flat tax in Ontario is a political non-starter. But, still, it's nice to see somebody with the backbone to actually mention it out loud; and more so at a time when fiscal conservatives in Canada seem to be heading for the endangered species list.

It's an ill wind . . .

While the Financial Times may have the best coverage of the economic meltdown it isn’t hard to find candidates for the worst, starting with the Toronto Star. The business “section” in the Sunday Star now consists of one page, or half the space given to Malene Arpe’s weekly celeb photo foldout and snarkfest (now pretty much the best part of the paper). Anyway, in this week’s half-baked offering David Olive takes time out to celebrate the collapse of the Irish economy. The former Celtic tiger has been a stone in the shoe of tax-and-spend types for some time now. It slashed corporate taxes with the result that the economy blossomed – and that fiscal conservatives here started agitating for tax cuts with a view to producing similar results, an argument the left didn’t really have any good answers to. Until now. Fortunately, the Irish let their good fortune go to their head and now have a property bust, rising unemployment and a debt-to-GDP ratio of around 80% (very bad – that’s actually a little ahead of where Canada was in 1996). So now, we see Ireland heading for an 8.3 percent drop in GDP just this year alone. That’s what economic reform gets you.

Of course, that doesn’t quite wipe out the growth it experienced in the last decade, to say nothing of the decades before that. According to figures here, the real growth rate (excluding inflation) averaged about 5.6 percent from 2000 to 2008, for a compounded total of 63 percent. So giving back 8 percent doesn’t exactly vitiate the pro-growth regime. In fact, if the Irish economy remained flat for the next ten years it would probably still outperform Canada over the 2000-2020 window. But never mind the facts. They got what was coming on account of their stupid corporate tax cuts.

Although when you dig a little deeper, the real reason that Ireland did so well pre-2008 wasn’t corporate tax cuts at all. It was EU subsidies:
Those who spoke with such confidence about the salutary effects of Ireland's pro-business climate had little understanding of what actually yielded Ireland's brief super-prosperity. Joining the European Economic Community (which eventually became part of the newly formed European Union in 1993) unleashed a flood of subsidies to pay for transportation and other basic infrastructure, and to support Irish farmers under Europe's notoriously protectionist Common Agricultural Policy.
This used to be the progressive line (sweeping under the carpet the failure to explain why half a century of subsidies never turned Quebec or the Atlantic Provinces into “Tigers”). Mr Olive is maybe so used to repeating it that he can’t stop blurting it out through force of habit. So to summarize the whole position: tax cuts and other free-market reforms caused a fake prosperity which lead to overheating and a devastating collapse –so devastating that it may offset several whole years of the last two decades of growth; except that the prosperity was really caused by EU assistance because corporate tax cuts never work. Well, never mind the logic. It’s mud in the eye for capitalism and the Fraser Institute and that’s all that really matters.


The best reporting and commentary on the ongoing and (probably) historic financial crisis is in the Financial Times ($3.15 at the newsstand, but still very good value compared to the Toronto dailies, and available even on Mondays). A nice article with a more philosophical tone by Alain de Botton from the other day. Now, normally the thoughts of French intellectuals on economic matters wouldn’t have much of a claim on most readers’ time, but this item is right on the money:
If we do not dwell on the risk of sudden calamity, in the money markets or elsewhere, and pay a price for our innocence, it is because reality comprises two cruelly confusing characteristics: on the one hand, continuity and reliability lasting decades; on the other, unheralded cataclysms. We find ourselves divided between a plausible invitation to assume that tomorrow will be much like today and the possibility that we will meet with an appalling event, after which nothing will ever be the same again. The Goddess of Fortune can scatter gifts, then watch as with terrifying speed a 50-year-old company disappears or a balance sheet is destroyed by toxic assets.
We should, of course, instead remember the great pessimistic voices of history. There are two quotes I cherish for these sorts of times. One is from Seneca: “What need is there to weep over parts of life? The whole of it calls for tears.” The other is from the French moralist Chamfort: “A man should swallow a toad every morning to be sure of not meeting with anything more revolting in the day ahead.”
But read the whole thing.


John Ivison in today’s National Post is critical of the government’s decision to take a stake in Chrysler, citing an estimate that the cost is going to be $200K per job saved – or saved for the moment, since the odds are that Chrysler will eventually go under anyway. But the best part of the column is at the end, where JI takes a sideways swipe at Canada’s Unnatural Governing Party.
The Conservatives have now veered so far from the good graces of many of their core supporters that they may never recover. That's not to say they will defect to the Liberals, but it may be that in the coming months, contributions to Conservative coffers start to dwindle and there is less enthusiasm to turn out at election time.

Mr. Harper has shown himself to be a pragmatist without parallel in recent weeks -- which is not necessarily a pejorative term. But leaders must deal in hope, and the hope for many Conservatives is that they live in a country that rewards exceptionalism.

The partial nationalization of a dying company couldn't be further from those hopes.