Mao, Debt and the Dangers of Ideological Fixation.

May 10, 2017

Millions have and will continue to suffer under the illusions of political ideology. Politicians whose grand designs provided little more than the harsh lessons of history. Conveying to future generations the misery bequeathed by those who stray too far from the dictates of reality.
Between 1958 and 1962, China's Mao Zedong embarked upon such an illusory path. One of the most industrious and tragic campaigns the world had ever seen. His objective? Display for all the world the might of China's economic prowess.
Mao reallocated nearly all of China's resources towards the production of steel. Outstripping global demand. Simply to make a point. If China could produce so much steel? Surely its political and economic system was superior to all others. Perception, Mao believed, was everything.

To that end, even farmers were tasked with melting down their equipment to bolster China's mythical steel production.
As Mao zealously pursued his grand illusion, food shortages grew. Starvation ravaged the nation. Worsened by the cruelty unleashed by Mao's government in order to maintain his massive illusion.
Of course, ideology and reality rarely make good bedfellows. And we'll return to Mao in a moment. For today's political leaders hold no less vigorously to their own ideologies. Usually to the detriment of pragmatic leadership.
Consider the American economy. Trapped, it would seem, in a low-growth malaise. But why?
To begin, look at last year. Which represented an ignominious mile marker. One that, according to the media, saw the U.S. finally transition from a growth-oriented nation to one in decline.
2016 was the end of a decade in which the nation's gross domestic product (GDP) growth -- national economic productivity -- never rose above three percent. A first for any 10-year period in the history of the United States.
Some pundits excused the woeful economic output. Blaming the Credit Crisis. Others took to quoting a new breed of bearish economists. Who choose to refer to today's lower-economic output as "The New Normal." A dismal reality to which we must all become accustomed.
The New Normal refers to an era characterized by drastically lower economic growth. A term popularized by renown bond manager Bill Gross. One that has been repeatedly used in the wake of the Credit Crisis as the nation has struggled to regain its economic footing.
Of course, this terminology suited D.C.'s bureaucracy just fine. More than willing, as they were, to buy into reduced forward-looking assumptions. By dramatically reducing the electorate's expectations, the benchmark against which political results are measured.
Soon, Washington's public perception machine got to work. Bolstering the sorry economic outlook with reams of data, outlooks, reports and other contrivances. Heavy on doom and gloom. Light on solutions.
Of course, when you're responsible for creating the problem (productivity-killing debt), you're less apt to argue for positive near-term economic progress.
Accordingly, the Congressional Budget Office (CBO) recently published a report on the nation's fiscal future. Positing that the national debt -- which doubled in the eight years of Obama's presidency -- will double again over the next 30 years. Reaching 150 percent of GDP. Aligning the U.S. with Greece, in terms of fiscal profligacy.
During this period, the nation's interest payments (debt service) will become its biggest budgetary line item. Exceeding its annual defense expenditure.
Federal spending forecasts show these interest expenditures soaring over the next 20 years. From 22 percent of GDP to a whopping 28 percent.
Translation? Never in the nation's history has the burden of supporting Washington weighed so heavily on the rest.
Most troubling are projections forecasting decades of sluggish economic growth. Targeting 1.9 percent average annual economic growth for three decades. A sharp contrast to the three decades leading up to 2001, when average GDP was 3.3 percent.
All of which means that Washington, under such economic conditions, has little to no chance of balancing the nation's budget.
Such is how pigs are prepared for slaughter.
The liberal response? Tax the rich! Only, 25 percent of the nation's highest earners already provide 90 percent of its income taxes.
The conservative response? Austerity! For which D.C. hasn't had the stomach since FDR began handing out entitlements like Mardi Gras beads.
A recent paper by Daniel J. Mitchell of the CATO Institute argues that, "more than 100 percent of our long-run fiscal mess is due to higher levels of government spending," and that, "the spending burden is rising because of Social Security and the health entitlements."
These conclusions were repeated by the Committee for a Responsible Federal Budget. As well as in the "Blueprint for Balance" published by the Heritage Foundation. Making the problem, in the estimation of this layman, quite obvious.
Yet, in Washington D.C., the stark relief of reality and the enthusiasm for action do rarely these days meet.
Neither Republicans nor Democrats are about to cut major American entitlement programs like Social Security and Medicare. As doing so would be tantamount to political suicide. Hell, today's GOP can't even agree on repealing Obamacare. Which has for eight years haunted them like rumors of an ex-girlfriend who won the lottery.
Leaving us with few options. Save for one.
Let's assume that the New Normal is entirely off the mark. It's become the conventional thinking. Which means it probably is. So, what if the U.S. achieved three percent GDP growth over the next few decades?
According to Research Affiliates, by 2040 the nation's economy would blow past the CBO's $29.9 trillion projection on the way to hitting $38.3 trillion in output. Adding an additional $8.4 trillion in economic output. Equating to the entire annual production of every state west of the Mississippi.
By 2047, growth would hit $47.1 trillion. Adding an additional $13 trillion to the CBO's estimate. Providing $2.5 trillion in additional tax revenue each year. Which would more than pay the bills, while covering most of the unfunded costs of Social Security and Medicare.
More importantly, three percent growth would immediately lower the nation's debt-to-GDP ratio. And avert the debt crisis to which the CBO has alluded in recent reports.
You'd think that Congress and the White House would be gleefully aligned in this way of thinking. Because, only by ensuring that the economy grows faster than the government can we avoid another debt crisis. Tax increases won't help. Austerity won't help. Only growth matters.
Of course, politicians are rarely voted into office for their visionary insights. But there is precedent for such productive unanimity. Remember the Nineties?
President Clinton and the Congress balanced the budget. Resulting in surpluses that spurred a 16-year economic boom that saw revenues catch up to expenditures. The stock market roared after a capital-gains tax cut. Further enhancing revenue receipts. And thanks to some agile leadership, federal spending was restrained as President Clinton and a Republican Congress worked together for the greater good.
In today's caustic environment, such bi-partisan efforts ring like a distant dream. But, we'll side with the optimists.
Assume that both parties agree on the need to spur growth. Forward-looking policies that spur innovation and release the animal spirits would certainly propel the economy higher. So, what policies favor productivity and GDP growth?
Most economists favor moving away from taxing capital and towards taxing consumption through value-added or sales taxes. Taxing capital hurts growth because capital is migratory. Capable of crossing borders to find the highest risk-adjusted, after-tax return. Economists from both parties have said that eliminating capital taxation in favor of a pure consumption tax could buoy GDP growth by five to nine percent.
While predicting future innovation is dangerous, deregulation and streamlined licensing requirements do facilitate job mobility and entrepreneurship. Tax reform that encourages and rewards investment should stimulate additional capital investment.
Assume that tax reform, something that both parties can agree upon, is passed this year.
The Tax Foundation forecast that the House Republican tax plan would raise wages by eight percent. Boost GDP by nine percent. And lift capital spending by 28 percent. If such projections are even close to accurate, what's with all the arguments? Get it done!
Additionally, an increasingly strong economy, perhaps paired with welfare reform, could bring upwards of 7 million healthy 18 to 65-year olds back into the work force as the labor participation rate reverts back to historical averages. It has sat as multi-decade lows for eight years.
Further, some type of fiscal stimulus and diverse infrastructure spending should enhance demand and efficiency. Using technology to improve education and job training will better match skills and jobs across the economy.
Finally, there are glimmers of hope on the economic horizons.
Recent technological advancements should eventually serve as wind in our economic sails. Robotics, artificial intelligence and automation. Such advancements will eventually help to enhance productivity while lowering costs. Spurring national growth and providing unforeseen career opportunities.
These policy changes will enhance productivity and GDP growth. As to whether Congress can rain in government spending to better control the federal balance sheet? That remains to be seen.
Congress must impose a bit of austerity on federal expenditures. Capping spending. Reining in the administrative state. And flattening the payout formulas for entitlement programs.
According to CBO projections, the nation's unfunded entitlement mandates will eventually bankrupt the federal government barring future reforms. So let me be frank: entitlement reform must be on the table. If even to amend programs offered a generation from today. Otherwise, all of our efforts and innovations will be for naught as the interest on the national debt spirals beyond control.
Tough medicine. But nothing that impacts current constituents. Bringing less political risk. Making it more attractive to election-minded politicians.
If lawmakers can do these things, and the private sector delivers on the aforementioned innovations, then the U.S. economy could explode. Leading federal deficits and debt to melt away. As it did in the 1990s. Leaving us only with the problem of suppressing government spending as GDP and tax revenues rise in concert. But one thing at a time, right?
Time for D.C. to put its ideological bickering aside and prioritize that which is in the best interest of every American: creating the kind of rising economic tide that lifts each and every boat.
The nation's pathological fixation on ideology will cost it dearly. Eventually, more than it can afford to pay.
From 1958 to 1962, 45 million Chinese were worked, starved or beaten to death. Only 10 million fewer than the total killed during World War Two, which had ended only 15 years earlier.
Mao's great famine ranks among the greatest disasters of the 20th Century. An event that never had to occur. Conducted solely to undergird the perception of a failing ideology. Leaving millions to pay the ultimate price.
Today's partisan wars, though lacking the tragic outcomes of Mao's battles, are wreaking untold havoc on the economic prospects of current and future generations. Stifling growth, technological advancements and productivity. Denying capital required by the undiscovered innovations of the next Edison, Jobs or Musk.
And for what? To gain the upper hand in the weekly news cycle?
High time that our political class untether itself from its divisive ideological moorings. Ideologies that have been detrimental to constituents, the economy and the nation.
The United States needs a rising tide. Not continuous ideological brawling. D.C.'s ideologues have done little but divide the nation's electorate. Creating a caustically divisive atmosphere upon which Washington's megalomaniacal party bosses sit on high. Whipping the angry, frothing masses below into worsening stages of frenzy.
My God it's disappointing.

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