As 2010 winds down, Obama administration and the lame duck Gongress have been busy in wrestling through few critical legislation. With the discontent of the voters demonstrated in Nov election that determined 30% of the (100 members) Senate, 100 % of the House of (435 voting) Representatives, and 25% of (52) State Governors starting next year, there have been much talks about compromise by the White House.
The top issue on the heap was the new tax policy and rate at the beginning of Jan 1st of 2011 as the two Bush era tax cuts passed in 2001 and 2003 were set to expire at the end of this year. By now we all have heard of the result – President Obama signed into law last Fri, Oct 17th, the newly passed $858 billion doallars tax and economic package - the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The name of the bill is a mouth full since it is a bundled package with political points (just like bundled deals in the consumer market) and is touted as a bipartisan bill. It doesn’t take a genius to figure out what all these just mean that each major political force gets something it wants badly and finds acceptable to trade votes for what oppositions want. Yes, the alternative is no one gets what he/she wants. No, it doesn’t necessarily mean the compromise is good for the people and the country. After all we are not talking about a win/win negotiated outcome in business whereby others are footing the bills. You and I are paying for it and all we have done is to reallocate the resources and wealth among different groups of people with a prayer that the overall pie may become bigger (if the total wealth increases as a result).
Only a short while earlier back in Nov, Alan K. Simpson and Erskine Bowles, co-chairs of the 18 members bi-partisan Presidential Commission on National Deficit Reduction, unveiled their 59-page proposal of how to reduce the deficit, entitled "The Moment of Truth." The proposal involves among others, deep cuts in domestic and military spending, a gradual 15-cents-a-gallon increase in the federal gasoline tax, limiting or eliminating popular tax breaks in return for lower rates, and benefit cuts and an increased retirement age for Social Security. If implemented, it is estimated to reduce the National debt by 4 trillion dollars by 2020 and would bring the country to a more sustainable financial position. By the way, the U.S. Federal debt (i.e. treasury securities held by those outside the U.S. government) currently stands at approximately 9 trillion dollars and the gross debt including the intra-government obligations is about 13.5 trillion dollars, compared to the U.S. GDP of $14.4 trillion dollars for 2009.
The question is “Can you handle the truth?” (remember the courtroom scene in the popular 1992 movie A Few Good Men when the self righteous Marine Commander played by Jack Nicholson shouted at the young defense attorney played by Tom Cruise?). The President Commission’s proposed solution (with the concurrence of 11 out of its 18 members) follows the intuitive and obvious with specifics – cut spending and raise taxes simultaneously. However, last week’s tax and benefit bill above demonstrated once more it is far more likely and easier for a two party democratic government to do exactly the opposite – cut taxes and increase spending simultaneously. When such a compromise happen often enough as it has been in this ideological war – Republican’s tax reduction and Democrat’s service/benefit increase, no wonder the national debt continues to climb with no relief in sight.
Who is to blame and what is the truth, you might ask. Unfortunately we, the people, are the ones who brought all these to ourselves; in other words – human nature. We want to have individual rights and freedom. We want to be left along only until we need to be bailed out. We want the right to vote and decide which politicians shall represent and fight for our personal interests and belief (among those who want to serve). We want to elect politicians who are smart, knowledgeable, honest, moral, capable, effective, fair, and have good judgment but we often prefer those populists who pretend(?) to listen to and represent our collective ignorance and uneducated opinions. We want to be richer and have a better material life. We want to pay less or no taxes and at the same time more benefits and guaranteed minimum standard of living. We want our companies make more revenues and profits but we don’t want them to outsource the work. The list of contradictions goes on and on…
Of course much of these contradictions and tensions get exposed and confirmed publicly only when times are tough and competition for resources became intense, and when the change in the environment reached or went over some critical points. The truth is governments all over the world, especially the more developed and dominant ones have always been deeply involved in the economic development and international trades. The recent financial crisis and near-great-depression simply pushed the governments to the front stage in this International Ponzi scheme as globalization penetrates every corner of the earth. It seems totally logical that the next phase in the process of globalization that cut deeply across nations’ boundaries is a government-driven model whether we like it or not.
What is less obvious is the need of increasing involvement of government with people’s day-to-day economic activities is putting each nation’s political system to severe tests, especially with the western democratic systems. Many notable Americans have made observations and talked about the frustration with the sluggish, if not stale mated, movements with economic policies which call for allocation of funds/resources with significant agreement of Senate, House of Representatives, and the President with more often than not different ideology. One example came to mind is the Thomas Friedman’s 2008 comment “Be China for a Day” in the context of “green revolution”. More than two years have passed. We all know how little the policy and legislation have advanced.
Back in Aug, 2008, Robert Reich, a former Secretary of Labor and now a professor at the University of California at Berkeley, wrote in his blog: “The real competition lurking behind the upcoming Olympic games is between democratic capitalism and authoritarian capitalism.” He went on to say “Democratic capitalism should win in the end because it responds far better to what people want -- not only as consumers but also as citizens.” I think he is a bit idealistic and too optimistic. To begin with, as I was just pointing out, what people want are often unrealistic and contradictory and as a result, end up trading long term wellbeing for short-term gains and instant gratifications.
Authoritarian capitalism (of varying shade and grade) has in post World War II brought economic successes at quite a few developing countries including Taiwan, Singapore, and South Korea with China being one of the new showcase. In the scale of human social-economic history, the jury is still out. But it seems clear that neither is going to be sustainable. Given that their successes do occur at different times and places, it strongly suggests the winning and sustaining solution may lie with one that can transition smoothly between the two adapting to the global environment. Perhaps what we can do is to delegate nation’s financial and economic matter to competent independent technocrats (not dissimilar to the Board of Federal Reserve) and leave Congress and President debate about the all important longer term big policy and social-political issues. The side benefit is we will definitely have a much smaller government once you take a big chunk of money out of the equation.
With this as food for thought, I wish you Happy Holidays. Talk to you next year!
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