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Ed Driscoll

Around the World in 80 Basis Points

April 29th, 2012 - 1:22 pm

And now for news of fresh Blue State disaster, both home and abroad.

But first, some background. Back in 2010, Theodore Dalrymple explored the revival of centralized economic planning in general, and the fortunes of its most prominent 20th proponent, John Kenneth Galbraith, specifically:

His books sold by the million and were available everywhere in cheap paperback editions; titles such as American Capitalism and The Affluent Society were known to almost all educated people. A teacher at Princeton, Cambridge, and Harvard, he was the editor for a time of Fortuneand the American ambassador to India. He was also the first economist to be widely known on television, not least through his sparring with William F. Buckley, Jr. (a close personal friend). His omnipresence as the voice of economics was both the result and the cause of a whole climate of opinion.

As is commonly the way, a reaction set in. Galbraith, who lived from 1908 to 2006, grew not only old, but old hat. His Keynesianism appeared outmoded in an era of unprecedented growth and prosperity apparently brought about by adherence to economic theories very different from his. No one believed any longer that demand management—the governmental regulation and, if necessary, provision of the demand for goods and services within the whole economy—was the way to combine prosperity with social justice. Rather, the market’s invisible hand and unconscious wisdom would lead us into the sunny uplands of expanding wealth and diminishing poverty.

But recently, there has been a reaction to the reaction. No sooner had Lehman Brothers collapsed than the printing presses started to roll out copies of Galbraith’s book on the debacle of 1929, The Great Crash. In fact, it couldn’t be printed fast enough, paperback books being affordable even in times of crisis. Galbraith was the hero of a recent PBS documentary extolling the value of big government. And demand management à la Galbraith is now back with a vengeance, of course. If the improvidently indebted but now impecunious private citizen won’t spend and thereby expand economic activity, the improvidently indebted but infinitely expandable government will do it for him.

So how’s that working out? Pretty badly, if these recent stories are any indication. First up, at Big Peace, founded by the late Andrew Breitbart, John J. Xenakis has this news of fresh disaster from Europe: “Spain Unemployment Near 25%; Britain Enters Double-Dip Recession”:

  • Spain’s economy keeps spiraling downward as unemployment rises to 25%
  • Switzerland considers paying illegal aliens to leave Switzerland
  • Britain’s economy moves into a ‘double-dip’ recession
  • Germany’s Angela Merkel angrily repudiates François Hollande’s campaign promises
  • Greece’s elections driven by anti-austerity, anti-immigrant fervor
  • Romania’s government collapses, Czech government survives, in anti-austerity anger

While President Reagan was working to expand entrepreneurship in the US in the 1980s, statist-oriented economists trumpeted the top-down economy of Japan as the better model — recall ’80s and early ’90s era-films such as Gung Ho, Black Rain, and Rising Sun. Two decades later,  Ross Douthat describes Japan as the “Incredible Shrinking Country,” facing demographic, and presumably economic, collapse as well, in the New York Times, and living out a real-life version of The Children of Men, PD James’ 1992 novel:

Japan is facing such swift demographic collapse, Eberstadt’s essay suggests, because its culture combines liberalism and traditionalism in particularly disastrous ways. On the one hand, the old sexual culture, oriented around arranged marriage and family obligation, has largely collapsed. Japan is one of the world’s least religious nations, the marriage rate has plunged and the divorce rate is higher than in Northern Europe.

Yet the traditional stigma around out-of-wedlock childbearing endures, which means that unmarried Japanese are more likely to embrace “voluntary childlessness” than the unwed parenting that’s becoming an American norm. And the traditional Japanese suspicion of immigration (another possible source for demographic vitality) has endured into the 21st century as well. Eberstadt notes that “in 2009 Japan naturalized barely a third as many new citizens as Switzerland, a country with a population only 6 percent the size of Japan’s and a reputation of its own for standoffishness.”

These trends are forging a society that sometimes evokes the infertile Britain in James’s dystopia. Japan has one of the highest suicide rates in the developed world, and there were rashes of Internet-enabled group suicides in the last decade. Rental “relatives” are available for sparsely attended wedding parties; so-called “babyloids” — furry dolls that mimic infant sounds — are being developed for lonely seniors; and Japanese researchers are at the forefront of efforts to build robots that resemble human babies. The younger generation includes millions of so-called “parasite singles” who still live with (and off) their parents, and perhaps hundreds of thousands of the “hikikomori”—“young adults,” Eberstadt writes, “who shut themselves off almost entirely by retreating into a friendless life of video games, the Internet and manga (comics) in their parents’ home.”

And speaking of Japan and Europe, “Europe faces Japan syndrome as credit demand implodes,” Ambrose Evans-Pritchard writes in the London Telegraph:

This slump in loan demand is more or less what happened during Japan’s Lost Decade as Mr and Mrs Watanabe shunned debt. Zero interest rates did nothing. The Bank of Japan was “pushing on a string” (though it never really launched bond purchases with any serious determination).

It is true that banks have slowed the pace of credit tightening, but they are nevertheless still tightening. “A banking crisis remains very much in play for much of the region,” said David Owen from Jefferies Fixed Income.

The credit squeeze is entirely predictable – and was widely predicted – given that banks must raise their core Tier 1 capital ratios to 9pc by July to meet EU rules, or face nationalisation. (The pro-cyclical folly of this beggars belief: by all means impose higher buffers, but not during a recession, and not by letting banks slash their balance sheets. The US at least forced its banks to raise capital, an entirely different policy since it does not lead to a lending crunch.)

The IMF said last week that Europe’s banks would slash their balance sheets by €2 trillion – or 7pc – by next year. This amounts to an economic shock. The Fund said deleveraging on this scale at a time of sharp fiscal tightening risks a “bad equilibrium”.

Indeed it does. It ensures hell for countries containing 200m people, or more. Judging by the rise of Sinn Fein, the Dutch Freedom Party, the Dutch Socialist Party (hard-Left), France’s Front National, and some true fire-breathers in Greece, they victims will not readily put up with this.

Oh well, what’s another potential “European Civil War” amongst friends and neighbors? Over on this side of the Atlantic, America’s Bluest of Blue regions are undergoing similar demographic and economic convulsions, as we’ll explore right after the page break.

It’s behind their subscriber firewall at the moment, but the latest issue of National Review has a devastating article on Detroit’s woes by Kevin Williamson, titled, “Let Detroit Fail.” And this is one Epic Fail, as the kids say on the Interwebs these days:

At some point, Governor Snyder and the people of Michigan will have to deal with reality: Detroit’s political leadership is a parasite that has outgrown its host. People are leaving Detroit as quickly as they can: Well more than 200,000 have left the city since 2000, and more than 1.5 million since 1960. Which is to say, Detroit’s refugees since 2000 could form a city bigger than Providence, Salt Lake City, or Des Moines. Those who have fled since the city’s peak could form a municipality bigger than any U.S. city except New York, Los Angeles, Chicago, Houston, or Philadelphia. But government spending in absolute terms long continued to rise; in per capita terms, it rises still, and the city spends far more per capita than the U.S. average. Detroit’s public sector has responded to every fiscal crisis by raising tax rates and by instituting new taxes, as often as not enabled by Republicans in Lansing. But new taxes and higher rates cannot offset the effects of the city’s rapid and steady depopulation — in fact, surveys suggest that they have hastened it — with the result that revenues declined by more than $100 million between 2007 and 2011. Income-tax revenue dropped by 18 percent, utility-tax revenue by 17 percent, property-tax revenue by 2.3 percent. Seeking a quick fix to its revenue problems, Detroit chartered several casino-gambling operations, only to see taxes from them begin to decline (by 1.5 percent last year) after a period of early growth. Detroit, once the wealthiest city in the United States by per capita income, is today the second-poorest major U.S. city.

Like many cities, Detroit has promised very generous pensions to its public-sector workers but set aside very little money to fund them, meaning that in 2011 the city had to put more than $70 million into the pension fund to keep making payments. Government is Detroit’s largest single employer, and spending on government remains very high. What Detroit is getting for all that spending is unclear: It has some of the worst schools, roads, sidewalks, and local services of any city in the country. [QED -- Ed] Last year, its murder rate was up 10 percent. Very few people with options are going to stick around to endure both the highest tax rate in the state and one of the highest murder rates in the country — let alone highly skilled, highly productive workers, investors, and entrepreneurs. Detroit is driving away the people it needs to survive. Who is left?

Who is left, Williamson goes on to write, are those who have caused the city’s collapse, its Ruling Government Class. In the state of California, a similar trend is occurring.

In the 1990s and 2000s, Sacramento looked upon the EU as a role model. In 2003, Californians ousted the hapless Gray Davis and replaced him with the soon to be equally hapless Arnold Schwarzenegger in order to change that model. In retrospect, Arnold cowering like a girly-man in the midst of threats from teachers unions and SEIU did little to change the perception in Sacramento that the voters worked for the government, rather than the other way around. And by the beginning of 2009, Shannon Love of the libertarian Chicago Boyz econo-blog wrote that in a sense, they did:

I think a threshold or tipping point exists in the ratio between the political power of those who pay taxes and those who consume taxes directly. After that tipping point is reached, those who pay taxes become the economic slaves of those who consume taxes.

I think California has passed that point. [h/t Instapundit] Tax consumers now control the state government and can vote themselves almost any level of personal income and benefits they wish while taxpayers cannot muster the political capital to defend themselves.

As Steven Greenhut writes in the Orange County Register this weekend, that’s yet another unsustainable top-down economic model. Or as Greenhut puts it, “California to middle class: drop dead,” with a similar demographic and economic train wreck brewing as in Europe and Japan:

The new USC study pointing to a much-slower rate of population growth in California has been greeted by demographers and urban planners as good news, in that it supposedly gives our state’s leaders a little breathing room to better plan for the future. The rate of growth has slowed to about 1 percent a year, the result of fewer immigrants coming here and many Californians heading to other states. “The cooling pace means the state, city and county governments and other entities will have more time to prepare for a bigger population than they did in years past, allowing for more effective planning,” according to the Los Angeles Times, paraphrasing the study’s authors. “That could ensure that new roads and parks, for example, are put in areas where they are most needed and where growth is likely to be sustained,” they said.

That’s an absurdly optimistic spin. California’s elected officials have been doing as little planning as possible, unless one counts planning to spend tens of billions of dollars the state doesn’t have on a high-speed rail line that will partially replicate what the airlines already do. Our leaders are battling new water-storage facilities and punishing farmers with absurd water-use restrictions. They impose roadblocks to building new highway systems, and land-use regulations make it nearly impossible to build the homes and businesses necessary to meet the needs of a growing population. You can hardly call that planning.

The state is still growing, but this decline in the rate of growth is a symbolic turning point: The California Dream is over. People don’t want to come here even though this is, with little question, the most beautiful state in the union. Americans – even those who like to mock our state – ought to think about what this means for our nation.

And that’s the topic Joel Kotkin explores this weekend at the Daily Beast, writing that “As California Collapses, Obama Follows Its Lead:”

Obama’s push to nationalize many of California’s economy-stifling green policies has been slowed down, first by the Republican resurgence in 2010 and then by his reelection considerations. But California’s politicians, living in what’s become essentially a one-party state, have doubled down on green orthodoxy. As the president at least tries to cover his flank by claiming to support an “all-in” energy policy, California has simply refused to exploit much of its massive oil and gas resources.

Does this matter? Well, Texas has created 200,000 oil and gas jobs over the past decade; California has barely added 20,000. The state’s remaining energy producers have been slowing down as the regulatory environment becomes ever more hostile even as producers elsewhere, including in rustbelt states like Ohio and Pennsylvania, ramp up. The oil and gas jobs the Golden State political class shuns pay around $100,000 a year on average.

Instead, California has forged ahead with ever-more extreme renewable energy mandates that have resulted in energy costs roughly 50 percent above the national average and expected to rise substantially from there. This tends to drive out manufacturing and other largely blue-collar energy users.

Finally, how are things doing in Obama’s adopted home state? “Illinois is running out of time and money,” George Will writes in the Washington Post:

To prepare for Illinois’ probable plunge into insolvency, read “Freedom to Fail: The Keystone of American Federalism” by Paul E. Peterson and Daniel Nadler in the University of Chicago Law Review. They note that only 25 of the world’s 193 nations have federal systems, and in most of the 25 the freedom of the lower tiers of government is more circumscribed by the central government than American state governments are by the federal government. American states’ greater freedom — autonomy under America’s system of dual sovereignty — from the central government’s supervision requires that they be disciplined instead by the market for government bonds, and by the real possibility of default.

Peterson, a professor of government at Harvard, and Nadler, a doctoral candidate also at Harvard, say that collective bargaining rights for government employees pose “a dramatically new challenge to the viability” of American federalism. They cite studies demonstrating that investors’ perceptions of risk of default are correlated with the rate of unionization among government employees. Higher percentages of government employees who are unionized, and larger Democratic shares of state legislative seats, correlate with increases in state borrowing costs.

At least 12 percent of Americans change their residences each year, often moving to more hospitable economic environments. In a system of competitive federalism, Peterson and Nadler write, “If states and localities attempt in a serious way to tax the rich and give to the poor, the rich will depart while the poor will be attracted.” And government revenues and expenditures vary inversely.

Mr. Obama may well win reelection in November, but as all of the above articles highlight, his vision of a sclerotic Galbraithian economic model is ultimately unsustainable, and his profligate spending of the American taxpayers’ money has only made things worse:

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Van Jones, Obama’s disgraced former “Green” “Czar,” unwittingly provided the perfect metaphor in 2010 for the president and his fin de siècle “progressive” worldview:

“I can’t stand it,” [Van Jones, speaking at Comic-Con Netroots Nation convention Friday] said of criticism of Obama from the Left. “President Obama volunteered to be the captain of the Titanic after it hit the iceberg.”

And proceeded to ensure that the ship would sink as fast as possible, with as few survivors as possible. While the handwriting is on the wall — even Palace Guard comedian Jimmy Kimmel quipped yesterday at the White House Correspondents Dinner that “‘There’s a term for guys like President Obama,’ Kimmel said with a pause. ‘Probably not two terms.’” — perhaps it would be fitting for America’s most profligate spender to be at the controls while the Blue State ship sinks to the depths of history.

Hopefully permanently this time around.

Update: “England: It was Fun While It Lasted,” Kyle Smith writes today on the PJM homepage.

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