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Commentary:Finding America’s Character

Economist Sven Larson

~By Sven Lars0n~

~07/05/2012~

(If you missed The Morning Zone Thursday morning then you missed Sven Lars0n’s guest appearance with us talking about the economics of Obamacare.)

It has been said that when a man is staring into the abyss, and there is nothing staring back, he either falls in or finds his character. That applies to nations as well. Independence Day, America’s birthday, was a good occasion for considering what that means for our great republic.

There is no doubt that we as a nation can spot an abyss ahead of us. We are not on the edge of it yet, but we are approaching it. We have let go of many of our adult responsibilities that the Founding Fathers entrusted us with. We have run up an enormous government debt; we have diluted our rights with stifling regulations that range from free speech to starting a business; we have put our armed forces to work where no work was needed, unnecessarily risking and even sacrificing American lives; we have blurred the boundaries between our three branches of government and allowed tax-paid bureaucracies to invade our checkbooks.

We have chosen short-term political gratification over long-term constitutional and economic responsibility. As a result, we have brought ourselves to the point where our children are growing up to a life no more prosperous, filled with no more opportunities, than ours.

We still have a standard of living that is the highest in the history of mankind; we still enjoy all the benefits of an advanced industrial society. But we are no longer advancing. We are no longer growing our prosperity. Our wealth trajectory is flattening.

What kind of country will our grandchildren inherit?

That question brings us to the edge of the abyss. A standard-packaged political answer to this question would be the combination of a nervous smile and some generic words about “It is all Bush’s fault” or “Obama is evil”. Either answer is guaranteed to make us take a step forward and fall into the abyss.

To find our character as a nation, we need to be bigger than that. We need to realize that the future we are facing, especially over the next couple of years, comes with more ominous threats to America than we can fit within the daily partisan bickering over who is responsible for the current economic crisis.

Don’t misunderstand me. I am not giving President Obama a pass for having mismanaged the economy. I have explained in numerous articles how and why his policies have failed. But his share of responsibility – or the share that falls on President Bush’s shoulders – is of little importance in view of what is coming down the pike.

More than finding out who is responsible for our current crisis, America needs to find leadership for the coming crisis. This is a crisis with global proportions – literally. There is growing evidence that we are heading for a perfect storm of economic uncertainty, fiscal mismanagement and political turmoil that span across several continents. To navigate through these stormy waters we need a president with exceptional leadership skills, with authority and credibility internationally – and with the understanding that his first and foremost duty at all times is to protect America.

To grasp the nature of this looming crisis, let us start in Europe. The enormous fiscal problems in Greece have been replicated by other countries, such as France, Italy and the Netherlands. The newest kid on the crisis block is Cyprus (see my analysis here; Cato scholar Dan Mitchell also has a good piece about Cyprus) which only reinforces the point made on this blog numerous times: the European welfare state is suffering from morbid fiscal obesity and there is no other way forward than to dismantle it.

However, it is going to be a long time before the Europeans come to that conclusion. Their immediate concern is to try and save their dying welfare states through yet more bailouts, a road that is rapidly coming to its end. Germany, the only country that has been able to carry Europe so far through its current crisis, is putting a big, heavy foot down. From the EU Observer:

Bavaria’s conservative leader Horst Seehofer has threatened to withdraw support for German Chancellor Angela Merkel’s coalition if more concessions are made to ailing euro-countries. Seehofer, who chairs the Christian Social Union in Bavaria … told Stern magazine on Tuesday (3 July) that Germany’s contribution to bailouts was already “borderline”. ”The time will come when the Bavarian government and the CSU can no longer say yes. And I wouldn’t then be able to support that personally either,” he said. “And the coalition has no majority without CSU’s seats,” the party chief added. His biggest fear, he said, is that markets will soon turn to Germany and start asking if it can cope with all the rescues: “That is the point I regard as the most dangerous of all.”

In other words, the Germans are beginning to realize that their attempts to lift Europe’s fiscally obese welfare states out of the water have failed. It is now dawning on them that if they keep trying, they will in fact fall in and drown with those who can no longer rescue themselves.

What does this have to do with America finding its character? I realize that I am taking you down a long road of reasoning, but it has a profound point. Please stay with me.

Back to the Germans. The decision to pull out of the bailout programs is the only right decision they can make. They have poured billions upon billions of their taxpayers’ money into the black fiscal holes of unsustainable governments all over southern Europe. These bailouts were sold as a way to help nurture Europe’s economy back to life again, but nothing has been done about the structural causes of the fiscal problems in, primarily, Greece. The black fiscal holes remain and the Germans are getting nothing but another spending burden in return.

Obviously, if Germany refuses to go along with more bailouts, the consequences for Europe will be enormous. This does not change the fact that pulling out is the only wise thing for Germany to do. And just to emphasize how desperate Europe’s problems are, the political leaders of Germany have been trying to bend and stretch their constitution to get German taxpayers to dole out more cash to their European neighbors. As the EU Observer story explains, this is not sitting well with some Germans:

[Mr. Seehofer] also vented anger at the deal sealed last week at an EU summit, where Merkel was seen as giving in to demands from Italy and Spain on changing the rules of the yet-to-be-created permanent bailout fund to help Rome and Madrid lower their borrowing costs. ”We were debating about the stability pact in the Bundestag. And at exactly that time the government leaders of some euro countries were working to soften precisely those stability criteria. Who is supposed to understand that?” Referendum suggestions made by finance minister Wolfgang Schauble are also a no-go in Bavaria: “Hands off our constitution! We have this constitution to thank for the most stable state and the most stable democracy there has ever been in German history. We don’t want a different constitution.”

He is referring to the constitutional changes needed for Germany to deepen its commitment to bailing out other European governments – or the violation of the constitution that German politicians would have to make themselves guilty of if they want to defy the growing opposition to Europe’s welfare-state rescue plan.

That opposition is coming from other countries as well, including Finland, Estonia, Slovakia and, notably, also-troubled Netherlands. The final quote in the EU Observer article illustrates how high the tensions are across the EU:

[German Chancellor Angela] Merkel is travelling to Rome on Wednesday to meet Prime Minister Mario Monti. ”We will try to overcome opposition from countries like Finland and the Netherlands, which have a certain intolerance towards stability mechanisms,” Monti said on the eve of the talks.

This statement reflects a great deal of arrogance on behalf of the Italian prime minister. But what is so ominous is that he is far from alone in harboring such disdain for a democratic discourse. Even though the German Chancellor is trying hard not to admit it, she is also trying to get around the German democracy and domestic critics who demand that the people – or at least the constitution – have a say in how their money is being spent at the European level.

In fairness, it is to some degree understandable that some politicians are willing to compromise with, or even sacrifice, the influence of the people in order to continue the bailout efforts in Europe. They see a crisis they so far have not been able to manage and want to resort to increasingly desperate measures to find a solution. They are right, of course, in that this is indeed a serious crisis – British Member of the European Parliament Daniel Hannan calls it a looming “Eurocalypse”.

But even if we accept the premise that Europe should sacrifice its democracy to save its economy, the solution they have suggested is not going to work. More bailout funds for overspending governments will not change the fact that those governments are still overspending.

Worse still is of course the fact that in the bargain, they will destroy the very democracy they fought a war over in the 1940s. The problem is that there does not seem to be any alternative in Europe to a showdown between democracy and efforts to save the economy. The austerity efforts in Greece and other countries have already paved the way for that artificial choice: democracy and a thriving economy are not mutually exclusive.

The problem in Europe is that they are using austerity to bring spending under control, a strategy that is indeed a big failure (as predicted). Instead of straightening out the economy, the austerity policies have perpetuated the need for the very same bailout programs that are facing growing resistance across Europe. The reason for this is that the overarching political premise in Europe is precisely that: to preserve the welfare state: the European political leadership want to save the welfare state by every method conceivable – even if it means creating a conflict between the economy and democracy.

So long as saving the welfare state remains the primary goal of Europe’s political elite, the continent is going to sink further into its current economic problems.

That spells trouble not only for them, but also for us here in America. Europe as a whole is an important political ally and a big trading partner. If they continue their economic decline, it will put more stress on our economy – and reinforce the need for a real American recovery policy. Obama has tried and failed to restart the economy; frankly, in view of where the world is heading, I am worried by Obama’s lack of macroeconomic insight.

Yes, the world. It is not just Europe that is sinking economically. China, a perceived – and to some degree actual – growth engine in the world over the past decade, is losing steam, and fast. The Global Post reports about one aspect of China’s problems:

It’s getting hard even for the bulls to pretend something isn’t off about China’s breakneck growth story. On the one hand, as everyone knows, China’s GDP is said to have expanded by an incredible average 10 percent per year for 30 years,according to the IMF, bringing millions of people out of poverty, and making it the second largest economy in the world behind America’s. On the other hand, much of this growth has been fueled by investment — in innumerable highways, airports, apartment complexes, and trains — so much so that some experts say China’s economy is not only imbalanced, but may actually be smaller than previously thought, due to waste and environmental destruction.

A very good analysis by Derek Scissors at Reuters lays bare far more troubling systemic problems within the Chinese economy.  From over-emphasis on investment to deteriorating demographics to expanding wastelands, China is about to face a serious hangover from the last decade. But that’s not all, as explained by this well-written piece in the Business Standard out of India:

China has debt at various levels and pockets. Let’s add to this central debt, the local government and provincial debt figures. This figure is around $1.9 trillion. Let’s further add the obligations of the Ministry of Railways. That’s $360 billion. And finally let’s also add 80 per cent of outstanding bank credit. This adds $6.3 trillion. We add bank loans to national debt because unlike most countries, China uses banks for nearly all of its directed, policy lending programmes. … By pushing its lending via the banks’ balance sheets, China creates the impression of a country that has very low budget deficits and, of course, very low central debt. We take 80 per cent of bank debt into the national debt figures under the assumption that 20 per cent goes towards consumer and private sector credit. Now let’s total up the few trillions we have unearthed. As of 2011, this figure amounted to a tad over $10 trillion! And the ratio of total debt to GDP becomes a more ominous 149 per cent. … But the story gets worse from hereon. China’s growth model is highly capital or, more accurately, debt intensive. … [Given] the overall low growth environment globally and the worsening trade situation for China, generating a unit of GDP growth now requires higher and higher doses of debt.

A slowdown of the Chinese economy adds insult to the injury inflicted by Europe’s perennial welfare state problems. If these analysts are correct – and I strongly suggest that they are – China is out of the growth game for many years to come. This, again, reinforces the need for skilled, strong, visionary political leadership in America.

It is bad enough that two of the world’s most significant economies, Europe and China, are at a point of standstill. What is even worse is the fact that in both places the economic downturn is likely going to be associated with a totalitarian turn in politics. In Europe, fears are rising that a collapse of the euro-zone will lead to a rise in aggressive political extremism. There are also acute signs of political desperation coming out of Greece, where the newly elected government is basically telling the rest of Europe to “help us or our democracy is dead”.

When we add this to the contempt for democracy increasingly put on display by Europe’s political leaders, we get a dangerous political environment where totalitarianism is poised to climb to political relevance, one way or the other.

It is entirely possible that China will go the same way, that the slow expansion of individual and especially economic freedom will come to an end with the nation’s strong growth record. If so, America will be squeezed on two fronts by a combination of economic stagnation and the resurrection of authoritarian political ideologies. That will require exceptional leadership of whoever is going to be our president after this year’s election.

To further reinforce this point, consider the turn for the worse of the “Arab spring” in Egypt. The Muslim Brotherhood is a dangerously totalitarian movement with clear ambitions to impose Medieval sharia law on the Egyptian people – and possibly to provoke a war with Israel.

How should we handle this, on top of the trouble seen in Europe and China? By reinforcing America as a beacon of freedom and prosperity in the world. We should respond to the storms rising across the globe by returning to the foundations that have made this republic the greatest nation in the history of mankind.

This will not be easy. There is a widespread notion that you can just hold an election and everyone will be swept off their feet by the amazing attractiveness of a European-style parliamentary democracy. In the Egyptian case, this has led some politicians, such as our own president, to believe that once the Muslim Brotherhood got to participate in an election, democracy and freedom would be there to stay. Another representative of this utterly naive perception is actually the aforementioned Daniel Hannan. While being on the right side of the issue of the collapsing euro, he was helplessly unable to see that the Muslim Brotherhood would take over Egypt by the very means provided by free elections. In a radio interview with Sean Hannity before the Egyptian election, Daniel Hannan confidently predicted that the Muslim Brotherhood was not going to win. He based his prediction on the existence of a middle class in Egypt which, he apparently believes, automatically will vote for politicians who resemble British liberals more than Egyptian Muslims. Because the middle class would stop the authoritarian Muslim Brotherhood from getting a majority, Hannan believed the Brotherhood would get bogged down in the grinds of parliamentarism and gradually transform into mellow British backbenchers.

This blind faith in some political gene connecting “middle class” to parliamentary democracy makes Daniel Hannan a sad representative of the Chamberlainian attitude that is so widespread among Europe’s and America’s liberal intellectuals. It prevented them from seeing how the Arab Spring was turning into a Nuclear Winter and it seems to prevent them from seeing how the slow crumbling of the European economy is very likely going to lead to the rise of totalitarianism there as well.

The same Chamberlainianism will prevent them from understanding that just because China has now gotten a big middle class, the country is not immunized against the resurrection of totalitarianism.

The root cause of Chamberlainianism is the failure to recognize the existence of pure evil. This failure leads people to believe that when someone says they want sharia law instead of a parliamentary democracy, you don’t take them seriously until they have in fact killed democracy (and a lot of its proponents) in favor of, well, sharia law. This failure to understand that evil is evil – nothing else – makes liberal intellectuals overlook the threats to freedom in their own backyards. Up to 40 percent of the votes cast in the Greek election went to parties that directly or indirectly endorse a totalitarian government over a parliamentary democracy.

Once totalitarianism has taken over, the Chamberlainian attitude is to talk to the tyrants – and all of a sudden believe the tyrants when the tyrants say that they want peace and freedom. In a world where economic crisis and totalitarianism is looming in all corners, we cannot afford to have a president whose entire foreign policy is built on Chamberlainian principles.

We need a president with Ronald Reagan’s moral backbone. And Dick Cheney’s resolve to defend America. We need to find the character inside of us that motivates us to elect the leadership we need – and to hold them accountable as true leaders, not bickering partisanists and opportunists.

We, the American people, need to find our way back to our national character.

Either we do that, or we fall into the abyss.

(Published with permission of Sven Larson and The Liberty Bullhorn)

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