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In mid May, 2010, European Union leaders approved a rescue package worth 750 billion euros (nearly $1 trillion) to buttress weaker states such as Greece, Portugal and Spain.  The funds were contributed by state governments on account of resistence to the EU itself raising the money through direct taxation in the states using the euro as their currency. In early 2011, Sarcozy and Merkel proposed greater EU coordination of fiscal policies in states using the euro. The proposal was shot down by Belgium's prime minister as a threat to the social agreement in his state. Whereas such resistence to giving the EU more governmental sovereignty is typically highlighted in news reports, I contend that simply having a common currency inexorably exercises a subtle though gradual force in the direction of further integration manifesting in more governmental sovereignty being transferred from the state governments to that of the EU. It is not always easy to see the changing contours of a forest when one is used to studying leaves.

According to David Marsh, the euro was intended to complete the European program of liberalized cross-border trade, promote the old dream of political unity, rival the dollar as an international reserve currency and — the most complicated objective — prevent an enlarged Germany’s domination of Europe by bringing its currency under European control.”  Before the euro went into effect, Chancellor Kohl of the state of Germany noted that a monetary union without a corresponding political union would be “a castle in the air.” His remark echoed the concerns of the Bundesbank, his state’s statutorily independent central bank, that unless there were greater political and economic anti-inflationary discipline and solidarity among weaker and stronger states, the monetary union would be doomed. I contend that this pressure for greater solidarity or coordination via EU governmental institutions is a pressure that is inherent in the monetary union, whose gravity pulls the EU toward further integration until the equilibrium point (with the monetary union) is reached.

To be sure, the EU was at a precarious place in 2010 amid the debt crisis and the attempt by the EU collectively to come to the rescue. Even though EU institutions had acquired a significant amount of governmental sovereignty, it was less than what was being required in responding to a common currency in trouble. A currency in any federal system requires some degree of fiscal consistency among the governments subject to the currency.  In the want of adequate means, the government representing the system as a whole can over-react out of sheer frustration. Beyond the emergency fund, for example, the EU Commission wanted the state governments to submit their budgets for approval before appropriating funds. This would have represented more political consolidation than is the case in the US. Euroskeptics would have hit the ceiling.

To the Europeans who deny the political or governmental aspects at the EU level (i.e., the ECJ, the EU Parliament, and the EU’s various political offices), fiscal coordination represents an infringement on the “national sovereignty” of the “member states.”  Even so, the need for greater fiscal coordination or consistency for the euro inexorably backs the even the Euroskeptics the uncomfortable position of agreeing to more sovereignty being transferred from the states to the union. The invisible integrative forces in monetary union do not bend to denial; instead, they bend it. So while the skeptics might get the headlines today, the extend of union even in 2010 presaged ever closer union even if the pattern involves fits and starts rather than a linear trajectory. In other words, it is best to have a long-term perspective in evaluating the implications of newsworthy events on the EU.

Source: http://www.nytimes.com/2010/05/18/opinion/18marsh.html?hp

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/

The $800 billion stimulus law had as much (or more) to do with improving the education system and rail lines, installing universal broadband, and modernizing electrical grids as reducing the unemployment rate. Consequently, the best that can be said regarding the latter is that the spending played a role in keeping the rate from increasing.  A steady-state is preferable to a sinking ship. However, avoiding a worse situation is a tough thing to campaign on. As an alternative, Barak Obama could have proposed something akin to Roosevelt’s Civilian Conservation Corps (CCC), which was a public work relief program for unemployed men age 18-24 from 1933 to 1942. The corps was primarily geared to providing work (and a pay check) to unemployed youth. The conservation and development of natural resources in rural areas of the US was the application. The CCC was the most popular New Deal program among the general public, providing jobs for 3 million from families on relief. Had providing an on-going paycheck to those on or off unemployment compensation been Obama’s priority, the president would have sought more labor-intensive uses for the $800 billion.  That would have meant that the money would have gone to the unemployed rather than to contractors (who admittedly might have let go some of their employees). A new CCC could have operated many of our towns and cities, being implemented by the states and funded by the US Treasury.  Job retraining could have gone along with the program. In short, the $800 billion could have been more focused on the immediate problem. I am not surprised that the republicans are able to portray the stimulus spending as ineffective with respect to jobs.

Sources: http://en.wikipedia.org/wiki/Civilian_Conservation_Corps ; http://www.nytimes.com/2010/09/09/us/politics/09bai.html?_r=1&ref=politics

Talking with a senior citizen about the 2010 midterm election, I was intrigued by her agreement with me; my views are perhaps too unusual for widespread agreement.  We were both just shaking our heads on how the local republican US House candidate won at 63 or 65% even though so many people disapprove of Congress.  I looked at the NYT map of the US House districts and realized that many incumbents won in spite of the fact that only something like 12% of Americans approve of the job Congress has been doing. Strangely, many more Americans are voting for their incumbents.  odd. Perhaps the voters are simply creatures of habit. The senior citizen and I were shaking our heads not only because of this discordance, but also because local unemployment is so high and yet the anti-government (anti-unemployment-compensation) party candidate won the US House seat so handily.  Moreover, we were amazed that people have apparently ignored the need for more or better regulation—a need evinced by the financial crisis of 2008 and the BP explosion of 2010.

Voting for the de-regulation party (presumably because of the “out of control spending”…even as Bush spent $1 tillion of borrowed money on his wars and $800 billion on the bank bailout).  Obama’s only real spending was $800 billion on economic stimulus (which admittedly should have been for a CCC jobs program rather than paid to infrastructure contractor companies). I contend that Obama should have cut checks to the unemployed and to home-owners under water and in foreclosure (preventing foreclosures would have been good not only for the banks’ toxic balance sheets, but also for the supply/demand of the housing market!), rather than to infrastructure contracting companies and banks. Even so, Obama’s weakness does not justify voting for the de-regulation party. Voters should have been primarily oriented to the big picture … the failure of extant government regulation … and thus the need to strengthen regulation rather than to get rid of regulation … as evinced by the financial crisis and the BP explosion. The complicity of private enterprise in these two catastrophies was utterly lost on the voters who supported the Republican surge in 2010.  They may well have had other reasons, including how Obama spent the bailout/stimulus money. However, I contend that those voters missed the big picture: the big banks and big oil companies (as well as the health insurance companies) need to be regulated more, not less.

The fact that we almost lost our financial system and the Gulf of Mexico makes “But I’ve always voted Republican” not good enough.  Not good enough at all.  I suppose it is the politics/election/voting as usual that stands out for me as particularly odious this time around. I am appealing not for the Democratic Party (as its leaders have sold out to the banks, oil companies, and defense contractors), but, rather, to the public good.  To be sure, $13 trillion in US Government debt is itself a systemic risk evincing a severe imbalance in the American system of governance. However, voting to cut spending (after $1.3 trillion has already been spent on the wars—focusing on the unemployed) while urging tax cuts for the rich demonstrates a partial (or inconsistent) approach to taking the deficit seriously.  Given the size of the deficit in 2010, both spending cuts (including the military!) and tax increases are necessary.  The competing desire not to depress the economy mitigates both spending cuts and tax increases.  Even given the need to juggle these competing objectives (i.e., reducing the deficit and not putting a drag on the economy), I contend that the primary concern ought have been what lessons we could and should have drawn from the financial crisis of 2008 and the BP explosion in 2010—in other words, that business is more “the problem” than is government. I submit that the primary lesson should have been that we ought not to rely so much on private companies and the market mechanism—that government regulation is both currently flawed and necessary.  A de-regulation party is not interested in strengthening regulation or its enforcement because business wants less regulation.

In the wake of the financial crisis of 2008 and the near loss of the Gulf of Mexico in 2010, electoral politics as usual look banal in this context; even the perennial “tax and spend” debate looked small in 2010 relative to the near misses we had experienced in the previous two years.  Obama’s agenda was a mere speck in comparison to the near catastrophies we had witnessed.  The primary lesson I draw from the midterm elections of 2010 is that too many voters were still “voting as usual,” like cows chewing the cud.  The senior citizen with whom I spoke said, “Well, the fact that people have always voted a certain way … well, that’s just not good enough now.” I replied, “I completely agree.”

The Founding Fathers who fashioned the US Constitution believed that a virtuous and educated electorate is vital for a republic to be sustained.  This requirement is perhaps nowhere more salient than in how the voters react to systemic risk occasioned by near-catastrophies. Put another way, had it not been for government, the near-catastrophies would most likely have become full-fledged catastrophies (especially in the case of the financial system in September, 2008).  After that crisis, Alan Greenspan admitted in Congressional testimony that he had realized that his laissez-faire market philosophy contained a fatal flaw (involving volitility).  It is sad indeed that the de-regulation, big-business party surged less than two years after Greenspan’s comment.  Given the crisis of September, 2008, and the ensuring recession, the 2010 midterm elections should have been like the 1932 election rather than the 1994 election. That it was not indicates to me that lessons were not learned.  Sadly, at least in the American context, averting catastrophe is not sufficient for lessons to be learned.  Perhaps it is only human nature to act on minor issues and overlook the big picture; electoral campaigns are certainly oriented this way. Even so, voting for a de-regulation and big-business party simply does not make sense just months after BP and Halliburton cut corners to save time and money at the expense of safety (discounting the destruction of the Gulf) and just over a year after big banks created fraudulent mortgages with hidden ARM rate increases and went on to sell securities and allowing some of them to be rated AAA. I do not believe that memories can be even so short. Perhaps big business has manipulated the American campaigns without us realizing it. If so, we are complicit nonetheless for not recognizing it and just saying no.

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.