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Given the $13 tillion amassed in US Treasury debt plus all the debt amassed by the American states, the US dollar was losing out in percentage terms to other currencies as the global reserve currency in 2010. To be sure, in absolute terms, there were still more dollars being held abroad than twenty or thirty years ago, but as a report from Emma Lawson of Morgan Stanley shows, other currencies were taking on more of a relative presence.

The Euro had been making the greatest strides in percentage terms, particularly in 2002. The slight downturn in 2009 might have reflected the impact of the financial crisis of 2008 in Europe, though the Greek debt issue had not yet reached a boil (it would be interesting to see the figures from 2010).  In any case, the dramatic drop in the dollar’s percentage terms also came in 2002, before the Iraq war and the bank bailout spending (i.e., the $13 tillion dollar debt). The drop could have been in reaction to September 11, 2001, though it would seem an exaggeration even then to say that the US financial system would be undone by the attack.  Even so, as we know from 2008, irrational exuberance can take hold in even a global market. We ought nevertheless not lose sight of the fact that the number of dollars held in reserves around the world increased. The pie got bigger, and even though the dollar piece became larger, it was a smaller proportion of the pie in 2010.  Even so, the $13 tillion in US Treasury debt, the decision of the Chinese to allow their currency to appreciate to a limited extent, Russia’s call for a mix of global reserve currencies, and the EU’s bailout of the Greek bonds all pointed to trouble for the US dollar as “the” reserve currency. Also troubling was the UN report at the end of June, 2010, which urged that the US dollar is no longer stable enough to be the world’s reserve currency. Ouch! The dollar slid %5 in June. Fortune reports that central banks had been preferring gold to the greenback.

Lawson believed that  ”over time we anticipate that reserve managers may reduce their holdings further.” She is looking at the significance of small percent changes over a short time—and this I see as perhaps susceptable to overblowing small trends. For example, she found that central banks had dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” But was such a change, relative to those shown in the chart, really significant? She argued that other dollars - the kind that come from Australia and Canada - had been benefiting from skiddishness on the dollar. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation. She was undoubtedly assuming that the trend would continue, but a look at the chart can demonstrate that even the dramatic changes in 2002 had not continued at such a rate (e.g., for the euro and the US dollar). 

Even so, Treasury’s huge debt could not but undermine the US dollar over the long term. This point ought not to be minimized or ignored under the fiscal pressure to push the US economy out of recession. Even if the US did not admit that the debtload was too high to be paid down one day (the debt then approaching the annual GNP of the US), the market rendered its verdict. Relative the huge debt facing the US dollar (and remember there are huge state debts, such as in California, Illinois and Florida!), the “crisis” facing the euro in 2010 paled in comparison.  As of mid 2010, the euro was still over $1.20. Years earlier, it had been at parity. The media frenzy on Greece's debt in 2010 ought therefore to be put into some kind of perspective, and the impact of the dollar’s public debt not be lost. 

It’s not clear to me that the human mind can conceptualize a trillion, not to mention thirteen of them. Yet we glide over the public debts in the US as though they were sustainable. If the US falls, it will be from within--from consolidation at the empire-level.  Such a fall will likely come as a surprise to most Americans, who in being oriented to external threats tend to miss the gravity of the black hole amassing under our very noses.  To be sure, the additional debt enables us to live beyond our means as a society, and such a condition can be very addictive.  Perhaps the parallel question for us to reflect on is whether Rome fell from within or simply from the Goths.

Sources:
 http://www.businessinsider.com/morgan-stanley-dollar-euro-reserve-holdings-2010-7#ixzz0tBDYFjMd
 http://wallstreet.blogs.fortune.cnn.com/2010/07/09/central-banks-start-to-abandon-the-u-s-dollar/

Fourteen times a thousand times a billion.  Such a number can only be known abstractly to the human mind.  A person is not apt to see 14 trillion widgets and thus fully realize how many that number signifies.  Just in an abstract sense, however, the number can be understood represent debt that is beyond sustainability.   If not, then exactly how much signifies the threshold over which any additional debt will never be paid back? At the beginning of 2011, the U.S. Government's debt was at about $14 trillion.

Consider the following from The New York Times when the debt figure was just $12 billionin 2009. “With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher. In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.” As much as the interest expense is expected to be (and the implied difficulty in paying down the debt, let alone covering its interest expense, it may be even harder before long.  According to The New York Times, “Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.”

While the deficit-spending is perfectly understandable in the context of a financial crisis and otherwise likely economic depression, such spending has hardly been saved for such times.  In fact, it has been part of “normal” US Government budgeting.  What the newspaper doesn’t mention is that even in the late 1990’s when the government was running surpluses and the economy was booming, only part of the surfeit was used to reduce the government’s debt.  At the time, Bill Clinton’s administration used the “rationale” that the boom that had been going on since the mid-1980s would go on for another fifteen years from the late 90’s.   Even had that forecast been realistic, I’m not sure that all of the government surpluses together could have eliminated the public debt. 

In any case, fiscally the US Government has been out of balance for decades.   What might be the cause?  Two candidates come readily to mind.  The American culture is a rather self-consumption-oriented society wherein spending beyond one’s means is not a matter of moral disapprobation.  In other words, the problem may boil down to a “gimme, gimme, gimme” mentality—a lack of maturity, really.  Secondly (and relatedly), representative democracy itself may itself favor spending over taxation to cover it.  Any normative constraint that might operate at the individual level may not exist at the institutional level where representatives are effectively rewarded for bringing home the bacon and punished for raising taxes.  Although it could be argue that the representatives should be more responsible nonetheless (as their goal ought not be simply to be reelected), we can point to ourselves, the American citizens, as the force behind the unsustainable fiscal situation.  We don’t have to endure incumbants who have spent in deficits, but we do.  The US House incumbancy rate almost guarantees that once someone is elected, he or she can be virtually assured of being re-elected in two years, und so weiter.    The problem, in other words, lies within us.  Too few of us value self-discipline in ourselves.  We are unwilling to call other people on their profligate credit-card spending, and we refuse to vote out of office those representatives who have voted outside of a financial crisis for an unbalanced budget.  Consider how different a people we would be were to insist at the ballot box that our representatives actually make a contribution to paying down some of the debt (again, not during a financial crisis) each year during their terms.  How different we would be if we held our officials accountable for more than scandal.   How different we would be if we “just said no” to the credit card companies and went without the plastic (using debit cards that could be used only on positive balances and having a savings account for emergencies).  If we look at the US Government as unsustainable, what we are really saying is that we, ourselves, are fundamentally flawed as concerning being adults.  The problem, in other words, transcends finance and politics.  We are living beyond our means.

Source: http://www.nytimes.com/2009/11/23/business/23rates.html?_r=1&hp

While in the U.S. Senate, Paul Kirk, the interim U.S. Senator who took Ted Kennedy’s seat, said, “Without a legitimate and credible Afghan partner, that counterinsurgency strategy is fundamentally flawed. The current Afghan government is neither legitimate nor credible. . . . We should not send a single additional dollar in aid or add a single American serviceman or woman to the 68,000 already courageously deployed in Afghanistan until we see a meaningful move by the Karzai regime to root out its corruption.” 

Kirk was essentially arguing that the U.S. was enabling (i.e., in the sense that one enables an alcoholic) President Karzai, who had been reelected by widespread fraud. Whether the U.S. Government was trying to have it both ways, or was utterly unwilling to put its money where American principles are, the perception around the world was probably that the United States had sold itself out for short-term strategic/military advantage. 

How resilient are principles that are upheld only when they don't cost anything?  Could it be that standing more on principle--insisting on fair and free elections as a precondition for any American aid and military involvement--would mitigate the need for a surge? Such thinking runs against the grain in the modern world, which is actually rather primitive in its insistance on knee-jerk force.  An eye for an eye and the world will be blind (Gandhi).  September 11, 2001: we must hit back.  There is no other option. They must pay. Ironically, practicing Christians were not only cheering, but also leading the charge.  An eye for an eye.

“Be realistic!” you might say.  "It's a real world out there!" Ok, how about this: the U.S. Government could have concentrated its military force in Afghanistan on the actual culprits, rather than on rebuilding the country or taking on the Taliban.  Is it really so idealistic to cut off U.S. aid to autocratic governments? I suspect that we are limited by the status quo as a normative and descriptive limitation that is actually quite dogmatic in the sense of being arbitrary.  In other words, we believe our self-constructed walls are real; we don't see how rigid we have become.

Given the emphasis on force, does it make all that much difference who is occupying the U.S. Presidency? President Bush invaded Iraq. President Obama criticized this policy then led a surge of his own in Afghanistan.  Eisenhower warned of the military-industrial complex, and both Bush II and Obama played ball with these pay-masters.  Meanwhile, we were mollified with the government's “scoldings” of Wall Street banks (the strongest of which went back to their old ways anyway).  Can we blame the bankers for ignoring government officials whose principled leadership is so contingent? People, especially powerful people--like Wall Street bankers and Karzai--can sniff hypocrisy and automatically reduce the respect given.

The United States is like a giant machine, or a very fat person, who can only move slowly…turning woefully slow with a rudder that is too small.    Meanwhile, we vaunt our ship as the biggest ever made: A city on the hill, from Puritan lore. We can’t sink, we assure each other.  But our ship of state is made of iron. I assure you, it can sink, and all the more because we have drifted out into deep water without realizing how far we have gone…how far off course.  Our rudder is too small for our mechanized monstrosity--our Titanic laden with $14 tillion in federal debt alone (not counting those of the states). Our primative knee-jerk reactiong after 911 suggests that everything we know is wrong, even as we presume we can’t be wrong.   So as we rearrange the deck-chairs at our mascurade dance, we order more champaigne and congraduate each other on having the biggest ship.  Meanwhile, is anyone looking ahead for icebergs?  We are so sure of our ship, and thus so vulnerable.

Source: http://www.cnn.com/2009/POLITICS/12/01/afghanistan.liberals/index.html

I think it is because income/wealth/profits is valued so much in the US that there is such selfishness recoiling from Obama’s desire for universal health coverage. Also, the republican argument that the Bush tax cuts on incomes above $200,000 should be continued attests to the value. The fact that the argument is being made at all is unbelievable.  Data shows that the rich save the extra money saved from taxes, but that isn’t stopping the Republicans and some House democrats from arguing that the rich would spend the money to hire (i.e., lowering unemployment).  Incroyable, je crois.  The income taxed of small business people is on the income they take out…which would otherwise be saved or spent on themselves…not on their business.  The argument doesn’t make sense and yet it is made as if it does!  Incredibly, some democrats are beginning to buy it.  It is incredible that tax cuts are being talked about at all, given the $13 tillion US govt debt. I understand that raising tax has a contraction effect on the GNP, but how much?  The rich avoiding some additional taxes: would that really mean such a contraction?  Even if it does, the increase to the debt would tend to increase interest rates as well as the amount that the US Government will have to pay on interest. Moreover, an unsustainable public debt makes the US itself ultimately unsustainable. It seems small to worry about a slight contraction (if any) from the restoration of tax rates on those people who have the means to pay higher taxes. I suspect that the underlying reason for the argument is the hypertropic value put on wealth in the US.

Republican outside groups are outspending democrats by eight to one in the 2010 election cycle.  Citizens United, the court case allowing unlimited (and anonymous) corporate political spending (as if spending were speech!), is benefiting the republicans. The republican party advocates policies that are more in the financial interest of the wealthy (e.g., cutting entitlements and extending the Bush tax cuts for those over $200,000). In my view, the case opens up the dichotomy between a plutocracy (rule by wealth) and a representative democracy (rule by the people through their representatives). Although the latter is not perfect (esp when most of the people are idiots), it is better than rule by the moneyed interests (i.e., the status quo).  It is ironic that after electing real change, the forces of the status quo would gain the upper hand. Since the vast majority of American voters are not wealthy, the question is perhaps whether we can be effectively manipulated by political ads into voting for the interests of the wealthy. For example, one outside group had an ad complaining about the U.S. government’s debt and urging less spending on entitlements.  No mention is made of the roughly $1 trillion spent on the wars in Iraq and Afghanistan.  As another example, extending the Bush tax cuts for the wealthy is put in terms of the latter using the savings to hire workers, even though studies show that such tax savings are typically saved. An educated electorate seems to me the best means of resisting such manipulation. Essentially, the distinction can be said to be between the vested interests of the status quo and those of real change.  Too much power going to the wealthy can stultify the political system, such that we do not adapt.  An organism that does not adapt to a changing environment does not tend to survive.

Washington’s seeming willingness to print money rather than tackle tough debt-cutting measures is in sharp contrast to the approaches to relieving the public debts in Europe.  Ireland, for example, plans to nearly double its package of spending cuts and tax increases to try rein in its huge deficit.  Even so, borrowing costs in Spain, Portugal and Greece spiked upward again in late 2010 as investor concern re-emerged that those EU states would be hard-pressed to bring their deficits under control and avoid defaulting on their bonds. In short, the public deficits on both sides of the Atlantic are intractable problems—they being so deep.  Perhaps the only thing that can be said is that relying solely on tax increases or spending cuts is insufficient, and that beginning or continuing tax cuts is foolhardy.  It has been shown that Reagan’s tax cuts did not make produce more revenue for the US Government than it lost from the cuts themselves.  Some combination of tax increases and spending cuts seems inevitable in the West.  The trouble is, the problem is not just economic. “The scale of the deficits are just so big,” said Philip R. Lane, a professor of international economics at Trinity College in Dublin. “The issues are political as much as they are economic.”

See: http://www.nytimes.com/2010/11/08/business/global/08debt.html?_r=1&hp

The debate on whether the Bush tax cuts should be extended for the wealthy pits the interests of the rich against the need to bring down the over $1 trillion 2010 deficit of the U.S. Government. The inconsistency in the position is transparent in Sen. Jim DeMint’s call for smaller deficits and for a permanent extension of the Bush tax cuts for all earners. Deciding whether the rich should get a tax cut presupposes tax cuts for other earners, and thus does not question whether there should be any extention. Fareed Zakaria argues that “no matter how many programs you cut, you will need more tax revenue.”  Debating about who should contribute less tax revenue implicitly rejects the “more tax revenue” point. Taking it for granted that the Bush tax cuts will be extended regardless, Zakaria suggests that certain deductions could be ended. The deduction for interest on mortgages, for example, costs the U.S. Government $130 billion a year (while the tax cuts for the rich costs $700 billion). The interest deduction, Zakaria maintains, does not make sense in the context of the spurious sub-prime mortgages in which people were put in houses they could not afford. The deduction “encourages people to take on too much debt, inflates the housing market and has no real effect on homeownership.” In 1986, I watched in the Senate gallery as that august body unraveled its attempt to eliminate that deduction in the face of industry opposition.  The vested interests of the status quo had spoken and the senators fell like dominoes.  Given the power of business in Congress, it is unlikely that many significant deductions will be challenged.  So the debate is on how many people should get a tax cut rather than on how much the rates must increase for the U.S. Government to reduce (not even eliminate!) its deficit—to say nothing of reducing the debt from prior years. The debate, in other words, can not get beyond its own presuppositions, and the small rule. The debate on whether the Bush tax cuts should be extended for the wealthy pits the interests of the rich against the need to bring down the over $1 trillion 2010 deficit of the U.S. Government. The inconsistency in the position is transparent in Sen. Jim DeMint’s call for smaller deficits and for a permanent extension of the Bush tax cuts for all earners. Deciding whether the rich should get a tax cut presupposes tax cuts for other earners, and thus does not question whether there should be any extention. Fareed Zakaria argues that “no matter how many programs you cut, you will need more tax revenue.”  Debating about who should contribute less tax revenue implicitly rejects the “more tax revenue” point. Taking it for granted that the Bush tax cuts will be extended regardless, Zakaria suggests that certain deductions could be ended. The deduction for interest on mortgages, for example, costs the U.S. Government $130 billion a year (while the tax cuts for the rich costs $700 billion). The interest deduction, Zakaria maintains, does not make sense in the context of the spurious sub-prime mortgages in which people were put in houses they could not afford. The deduction “encourages people to take on too much debt, inflates the housing market and has no real effect on homeownership.” In 1986, I watched in the Senate gallery as that august body unraveled its attempt to eliminate that deduction in the face of industry opposition.  The vested interests of the status quo had spoken and the senators fell like dominoes.  Given the power of business in Congress, it is unlikely that many significant deductions will be challenged.  So the debate is on how many people should get a tax cut rather than on how much the rates must increase for the U.S. Government to reduce (not even eliminate!) its deficit—to say nothing of reducing the debt from prior years. The debate, in other words, can not get beyond its own presuppositions, and the small rule.

"The most significant threat to our national security is our debt."
Micheal Mullen, Jount Chiefs of Staff Chairman, August, 2010.

The defense budget in 2010--$664 billion (not counting the Iraq and Afghanistan wars)--equalled that of the rest of the world combined.  One dollar of every five spent by the U.S. Government was for defense. The amount spent represents 80% growth since 2000. Why?  One reason: the big weapon systems oriented to fighting other empires (e.g., Russia and China). For example, $600 million for the littoral combat ship and $13 billion for amphibious landing vehicles (whose purpose has even been questioned by Sec. of Defense William Gates).  It would seem that the military contractors--the military industrial complex, moreover--are firmly entrenched and in control. That is to say, the defense spending is indicative of the influence of big business over government in the United States.  That this influence goes unhampered may tell us something about the leanings of our societal norms.

The House Republicans' "Pledge to America" formulated in 2010 promises to exempt the military from any cost-cutting that might be entailed in reducing deficit spending. Even so, Sen. Tom Coburn wrote, "Taking defense spending off the table is indefensible. We need to protect our nation, not the Pentagon's sacred cows."  This statement is significant because it gets at the problem of the debt and the influence of big business in government.  That is to say, it kills two birds with one stone.  Indeed, these two birds may well be the achilles heel of the United States as a viable entity or going concern.  The fatal flaw may well be within, rather than from an external threat.  This is the meaning of Micheal Mullen's statement above. To be sure, Republicans believe that defense is government's core function. Along with regulating interstate commerce, this is particularly true of the federal government.  It is less true, I would argue, of the state governments.  So the plank can be viewed as primarily federalist rather than in terms of limited government itself.  The probably-unfixable $14 tillion US Government debt and the consolidation of public governance in the U.S. into the federal government at the expense of federalism (and the checks therein) are related; both are indications of a basic inbalance that is unsustainable. In the face of this state of affairs, it is telling that the question in late 2010 was who should continue to get a tax.

Source: Michael Crowley, "The Sacred Cows," <em>Time</em>, December 13, 2010, pp. 55-58.

“The power to borrow money is general and unlimited . . . By this means, they may create a national debt, so large, as to exceed the ability of the country ever to sink. I can scarcely contemplate a greater calamity that could befal this country, than to be loaded with a debt exceeding their ability ever to discharge. If this be a just remark, it is unwise and improvident to vest in the general government a power to borrow at discretion, without any limitation or restriction. (I)t would certainly have been a wise provision in this constitution, to have made it necessary that two thirds of the members should assent to borrowing money—when the necessity was indispensible, this assent would always be given, and in no other cause ought it to be.”

Brutus, Letter 8 (January 10, 1788), 2.9.95, in Herbert J. Storing, ed., The Anti-Federalist, Chicago: University of Chicago Press, 1985, p. 151.

"It's a great disappointment, a tremendous disappointment, because--what is it, $858 billion in two years added to the deficit? I mean, that just breaks your heart. What the hell do you think we've been talking about?"

Sen. Alan Simpson (WY-R), on the two year extension of the Bush tax cuts in 2010. Newsweek, December 27, 2010, p. 28.

"It will be precipitous. It won't be six months, might not even be six weeks. It might be six days when they suddenly start the flight. And I know how bankers are: once the flight starts, and the money and rumors, it'll be fast and difficult. . . . We don't know the tipping point. But the tipping point will come if you fail to address the long-term problem of debt, deficit, and interest."

Sen. Alan Simpson (WY-R), on the Chinese pulling out as a creditor of the U.S. Government holding Treasury bonds. Newsweek, December 27, 2010, p. 28.

On January 20, 2011, the Republican Study Committee, a group of fiscally conservative members of the U.S. House of Representatives, announced a plan by which $2.5 trillion could be cut from the U.S. Government's spending over ten years. According to The New York Times, "The $2.5 trillion in cuts would exclude the military, and would not touch the big entitlement programs, Medicare and Social Security. As a result, its effect on the entire array of government programs, among them education, domestic security, transportation, law enforcement and medical research, would be nothing short of drastic." The Committee's "leaders said this was appropriate and necessary, given the government’s $14 trillion debt and annual deficits at their highest levels since the years just after World War II." The RSC "proposed generally reducing agency budgets to their levels in 2006 — the last time Congressional Republicans controlled the budget process — and then freezing them, with no annual inflation adjustments. It also recommended slashing the federal workforce by 15 percent and canceling pay raises for five years, for a total of $2.29 trillion in savings. The . . . proposal includes an additional $330 billion in cuts to specific programs, including Amtrak, foreign aid and even the Washington subway system." (Source #1)

Analysis:
There is a lot to unpack in the above synopsis. I want to suggest a different way of looking at the proposal. First, the RSC leaders claim the cuts are "appropriate and necessary."  Taking the latter term first, necessity can be too subject to convenience. For example, back in July, 2009, The New York Times reported that most Americans continued to want "the federal government to focus on reducing the budget deficit rather than spending money to stimulate the national economy." (Source #2) Even so, in 2010 the Congress and the President went ahead with extending a tax cut that would add an expected $850 billion to the deficits of 2011 and 2012. If the tax cuts were extended to stimulate the economy at the expense of reducing the budget deficit, then our representatives were acting at odds with the wishes of most of the electorate. Also, extending the tax cuts undercuts the claim that spending cuts are "necessary," unless one argues that they became more necessary on account of the tax cuts' addition to the deficits. In short, it is odd that draconian cuts are deemed necessary so soon after the debt (and deficits) permitted extending tax cuts that would enlarge upcoming deficits. So "necessary" may be cited with a dash of convenience and obviated when not in our interest.  Such is human nature, I suppose. 

Second, the RSC's proposal's priorities in some ways mirror those reflected in polls, while differing from them in other respects. In general terms, Americans overwhelmingly say that they prefer cutting government spending to paying higher taxes, according to The New York Times. (Source #3) The RSC's proposal is in line with this finding. Also, the proposal is in line with the poll's finding that nearly two-thirds of Americans do not want Medicare or Social Security benefits cut even to reduce deficits. However, the poll, unlike the RSC, goes on to add that Americans by a wide margin preferred cutting the Penagon's budget to affecting benefits in Medicare and Social Security; the RSC treats all three areas the same--leaving them all off the block. The defense contractor lobby's influence on the Republican Party and the Republican view that the U.S. Government's major function should be defense are likely factors behind the RSC's treatment of defense.  Also, the ongoing "state of war" since 9/11 can enable the RSC and others to argue that defense should not be touched.  However, this "state of war" could easily become permanent, enabling the Penagon to develop a permanent shield.  Also, nothing like war has caused government to enlarge historically, which Republican leaders tend to criticize. So ironically this aspect of the RSC proposal may work at cross purposes with the party's own goals. Lastly, it should be noted that Medicaid, the health program for the poor, is not treated like Medicaid (health care for the elderly) by either the Americans polled or the RSC.  Perhaps the poor do not count as much as the elderly in the American consciousness, though it could be argued that "necessity" applies to both groups in that both can be dependent on society for basic needs. In other words, both most people and the RSC may be biased here.

To the Republican Party I would recommend linking the RSC proposal to Reagan's New Federalism--a goal that he never really implemented.  In simple terms, the states would pick up the ball on the social programs cut by the Congress. As the states are (in 2011) struggling financially, this extension in turn would need to be extended to include a transfer of some tax from the IRS to the state revenue departments. That is, federal tax cuts could be combined with state tax increases, such that the states could cover the social programs at the levels they see fit.  This last part, by the way, would better reflect the inherent diversity in the empire that consists of fifty united states.

To the Democratic Party, I would recommend pointing to the unfairness (and thus inappropriateness) of cutting some programs while leaving others alone (e.g., Defense, while Medicaid gets hit--affecting those least able to defend themselves politically). The Democrats might also urge a more balanced combination of tax increases and spending cuts, especially given the extension of the Bush tax cuts on the wealthy at the expense of the deficit--a questionable priority. Moreover, the Dems could point out that just because the federal government is unbalanced does not mean that the problem is too much government; it could be that government services are still needed--just not necessily from the federal government. Even if the federal government is too big, that doesn't mean that the problem is too much government. The problem could be sourced specifically in the federal government, and there are other governments in the union that could pick up the slack as we treat the patient. Of course, the Democrats might add that the rather severe financial conditions of the governments of California, Florida and Illinois, at least in 2011, is a huge caution sign for any New Federalism being implimented any time soon. Democrats could urge that any transfer of programs to the states be done after these states regain an equilibrium and fiscal good standing.

In general terms, restoring the balance necessary for federalism to operate as checks on BOTH the general and state governments can dovetail with relieving the pressure on the general government, which is so out of balance financially, by downsizing it by transfering some of its functions while reducing taxes though disproportionally (so to make up for the deficits and reduce the debt).  This last point may be difficult to grasp.  Federal tax would be reduced somewhat so states could raise taxes to cover their new domains, but the tax decrease would be less than the tax increase because the federal government would still need to fund deficits and pay down its debt. Yet before this theory could be actualized, the states in trauma would need to stabilize themselves financially. Perhaps the point being lost most on the public is that the $14 trillion U.S. public debt reflects a government out of balance, and thus of need to be downsized. We have the luxury of fifty republics that can take up the slack, assuming some of them now in intensive care can pull themselves together.  Of course, that some states are in such fiscal trouble could argue that the states are hardly in a better condition to take on governmental functions that are necessary in such an interdependent society. However, some of the Founding Fathers warned that the states would be starved where the U.S. Government ability to tax unlimited--the states' ability to tax being crowded out (so, for example, California's difficulty in raising taxes).  Perhaps Congress could help by giving the states some cover by lowering federal income tax rates with the understanding that the states would increase their taxes. Ironically, the states' condition may be a symptom of the imbalance in the bloated U.S. Government. Indeed, the dire financial condition of some of the states was predicted over two hundred years ago by some from the assumed expansion of the federal government. Perhaps now only that government, fueled by the people who alone are sovereign, can save the states that formed this union from dying.

At the very least, something is severely out of balance in the American system of government. I suspect we barely grasp the depth and extent of this problem; rather, we are likely debating how to treat various symptoms. As I write this, I am recovering from the flu.  The illness progressed because I mistakenly thought it was merely a bad cold because I had flu shot in November. The illness had to get far worse than it should have before I recognized it as such and headed for bed. I was incredibly resistant to recognizing the severity of the illness even as I was in it. Only after had freed myself from the chains of my assumptions and routine could I see the illness and take action to cure it by confining myself to bedrest. Similarly, I think the American system of government has the flu but we think it has a cold. We are debating whether to buy a syrup that reduces cough as well as fever and mucus or pills that block only the latter two. Meanwhile, we are still going on in our full routine, business as usual. Government as usual. To take another analogy, we are like a blind rider who rides a bike with tires severely out of torque and concludes he must be riding over mounds.  If our presumptuousness weren't so utterly pathetic perhaps we would be laughing at ourselves...but that would mean we could see.

"Man is born free, and everywhere he is in chains. One Man thinks himself the master of others, but remains more of a slave than they are." Jean-Jacques Rousseau, The Social Contract

Sources: 1. http://www.nytimes.com/2011/01/21/us/politics/21spend.html?_r=1&scp=1&sq=bloc%20presses%20leaders&st=cse
2. http://thecaucus.blogs.nytimes.com/2009/07/29/new-poll-bring-down-debt-dont-spend-more/?scp=2&sq=poll%20finds%20a%20willingness%20to%20cut%20spending&st=cse
3. Jackie Calmes and Dallia Sussman, "Poll Finds a Willingness to Cut Spending, Just not Medicare or Social Security," The New York Times, January 21, 2011, p. A11.

The New York Times reports, “At their first meeting of the year, Federal Reserve policy makers voted unanimously … to continue the central bank’s controversial $600 billion plan to spur the recovery by buying government bonds.” In other words, the central bank would continue to “print money” to buy up U.S. Government debt, allowing that government to go into more debt without putting pressure on the interest rate to go up (which would cost the government more in interest payments to bondholders). Theoretically, the Federal Reserve can buy an unlimited amount of bonds because the central bank can create money. Of course, creating money relative to GNP growth can spark inflation, but the central bankers are not worries. “The Fed did note that commodity prices had risen, but cautioned that long-term inflation expectations had been stable and that measures of underlying inflation had continued to trend downward.” Even so, “skeptics fear that the bond-buying — which has the effect of further expanding the Fed’s already large balance sheet — could lead to destabilizing asset bubbles or touch off inflation.” I contend that this is a rather narrow (though certainly valid) concern; equally or more troubling for the long term is the asymetry in the Fed’s treatment of debt issued by the U.S. Government and that of the state governments. For instance, in 2010 Illinois issued $16 billion in additional debt. Whereas the U.S.Government could fall back on the Federal Reserve, the latter has refused to purchase debt from states like Illinois. Aside from the unfairness inherent in the Federal Reserve’s proclivity, the asymetry subtly undercuts federalism. In other words, the U.S. Government having an unlimited ability to have its central bank purchase its debt gives that government still another edge over the state governments, which one can expect will be even more compromised in being able to check encroachments by the U.S. Government. The resulting enervation of federalism means that consolidation may reach us sooner rather than later, at the expense of our governments being able to act as mutual checks on eachother. Another way of making this point is to charge that the Federal Reserve’s refusal to do for the state governments what the central bank is doing for the U.S. Government evinces a structural bias in our system of federalism. The lack of balance (and the underlying unfairness) ought to be of concern to the citizenry. The result may well be that the U.S. Government will be enabled to get into unsustainable debt such that the empire itself may one day collapse under its own weight at the center.

Source: http://www.nytimes.com/2011/01/27/business/economy/27fed.html?ref=business

The nonpartisan Congressional Budget Office announced on January 26, 2011 that the U.S. Government’s budget deficit for the year would soar to nearly $1.5 trillion, which represents $414 billion more due to the extension of the Bush tax cuts. The deficit was $1.4 trillion in 2009 and $1.3 trillion in 2010. According to the New York Times based on the CBO, “the deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product, the largest since 1945 — representing 10 percent and 8.9 percent of the nation’s output.” The budget officials also projected the deficit for 2012 would be $1.1 trillion.” These figures dwarf the budget deficits even of the 1980s. President Obama, called in his State of the Union speech, also on January 26th, for a partial five-year freeze in domestic spending by the federal government — what the New York Times calls “a more gradual imposition of fiscal discipline, while still increasing some spending in education, research and other areas.” Meanwhile, the total debt of the U.S. Government in January, 2011 was over $14.3 trillion—a figure that is scarcely conceivable to a human mind, let alone sustainable. It is not clear that the government will ever be able to get out of that debt, let alone make a dent in paying it off.

One could be forgiven for wondering if President Obama severely understated the weakness in the state of the union, for such fiscal imbalances in the union’s federal government (not counting the deficits and debts of the several states!) can not bode well for the United States as a going concern. The $45 billion deficit in the Social Security fund ought to raise more than a few eyebrows. Even so, the last line of the President’s report included, “the state of the union is strong.” One could point antithetically to the states at odds with Washington on health-care insurance and immigration as cracks “strong” state of the union. Furthermore, one could point to the 3.4 million inhabitants expected to be foreclosed by the end of 2011 or the 9.7 million unemployed on unemployment compensation in January, 2011 (51,000 added the last week of January alone), as well as to the 40 million inhabitants within the U.S. still without health insurance (having to wait until 2014).

My point is that the intractible imbalances in the United States are of such magnitude that they can be reckoned as structural, or systemic, as of 2011. The prescriptions made by both parties, including extending tax cuts (and widening the deficits of 2011 and 2012) and the banal tax vs. cut spending debate pale in comparison to such an extent that one could again be foregiven for wondering whether the elected representatives have not been treating the problems as the status quo variety in need of standard solutions. If we are not careful, decisions borne of necessity will press down on us, and we won’t like them. The economist Carmen Reinhart, for example, has predicted that the U.S. Government will be forced to cut money for social services. Aside from whether we can get off the tax versus spending debate, I’m not even sure any of us know what a systemic or structural remedy would look like even if it jumped up a bit us; we are so utterly (and pathologically) oriented to incremental “solutions” that are oriented to alleviating particular symptoms that I wonder if we can even look the illness in the face and stare it down. Are structural or systemic solutions even possible in a representative democracy, moreover, or are we destined to be poll- and issue-driven? Are we too fixated on the status quo wherein we prioritize our debate on the size and involvement of government (e.g., tax increases vs. spending or tax cuts, rather more revenue and less spending) over the no less important though perhaps less immediately pressing exigency of fiscal balance that we will not take our structural problems seriously and discuss systemic changes before it is too late and our budgetary decisions are taken from us by the brute force of necessity? In short, can we bracket our incremental approach and think big, meaning about the system itself? What would be our thinking, je me demande…

Sources:

http://www.nytimes.com/2011/01/27/us/politics/27spend.html?_r=1&ref=politics;

http://curiouscapitalist.blogs.time.com/2011/01/27/view-from-davos-how-bad-is-a-1-5-trillion-deficit/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+timeblogs%2Fcurious_capitalist+%28TIME%3A+The+Curious+Capitalist%29&utm_content=Twitter