Will America Become Detroit, Part 6: The World Police Turn in Their Badges

"Beware of entangling allances"
-Pres. George Washington

"A Policeman's Lot Is Not A Happy One"
- From "The Pirates of Penzance" by Gilbert and Sullivan

Now that U.S. presidential nominees are decided by primaries, the party conventions have become pointless, predictable bores. They are little more than rallies disguised as deliberative bodies. Both conventions are so scripted that the few moments that stand out are those where some participant tosses down the script and improvises. One of those moments this year came from Senator Rand Paul's Republican convention speech. At a convention where military one-upmanship was the coin of the day, Sen. Paul made the case that to balance our budget, "Republicans must acknowledge that not every dollar spent on the military is necessary or well spent". This is a brave admission; even Democrats such as Leon Panetta argue that even the recent slowing of military spending increases threaten our security. Although Sen. Paul's views on military spending are in the minority, soon the debt crisis will bring these views into the mainstream. When we absolutely must make the hard choices, it will soon come to light that much of our military spending has nothing to do with defending our nation, and some of our military efforts actually damage our security.

Defending Everyone Against Everyone Else

The 2012 U.S. military budget accounts for 41% of all military spending done on this planet. Our military spending is more than that of Russia, China and our NATO allies combined. Why does it cost so much to defend a nation surrounded by two oceans, and bordered by two very friendly neighbors? The answer is that much of the U.S. defense budget goes to defending other nations. America maintains 900 military bases in 130 countries. Our nation has 119,000 troops in Europe, 37,000 in South Korea, and 45,000 in Japan. There 44 American military bases in Germany alone. The average American taxpayer pays more for these bases than the average German taxpayer does.

A large part of why the U.S. defense spending is so high is that it includes a huge ersatz foreign aid program where we take on the defense duties of many of our allies. This is a great deal for the countries we defend: their tax burden is lessened, this in turn gives them a competitive advantage over us, and fewer of their young people are asked to sacrifice their lives. But is this a good deal for us? And if not, how did we end up in this situation?

The Diplomatic Equivalents of the Helium Reserve

We are all aware of Department of Defense programs that were continued far beyond any practical purpose. The National Helium Reserve, originally set up to make sure we had helium for our dirigibles, continued until 2007. The horse mounted cavalry was maintained as late as 1942. And don't forget the Mohair subsidies ooriginally enacted during WWI guarantee enough wool for soldiers uniforms. These subsidies continued until recent years, in spite of the fact that no uniforms have been made from mohair for more than half a century.

The State Department has its own share of programs that go on far past the time where their original rationale made any sense. The prime example of this is NATO, started in 1949 to help European nations rebuilding after the devastation of WWII to defend themselves against the Soviet bloc. This treaty was originally intended as a temporary measure, to help out until these nations could defend themselves. Dwight Eisenhower, as NATO Supreme Commander said that “if in 10 years, all American troops stationed in Europe for national defense purposes have not been returned to the United States, then this whole project will have failed.” As a perfect illustration of the Reagan maxim that there is nothing more permanent than a temporary government program, NATO is still going strong after more than six decades, long after all the member nations have recovered from WWII, and even long after the Soviet threat has disappeared into history.

A similar situation exists in South Korea. After the end of the Korean war, one could make the case that it was in America's best interest to help our war-torn ally defend herself against communist aggression. But more than half a century later, South Korea now has a GDP 20 times the GDP of North Korea. If South Korea cannot defend herself now, when will she be able to do so?

When Defense Works Against Security

It is bad enough that American taxpayers are forced to pay for defend nations other than their own. What makes matters worse is what the CIA calls blowback, where the unintended consequences of American military ventures actually worsen our security. Major security failures such as 9/11 were retaliations for U.S. wars fought on foreign soil.

What Rand Paul said about defense spending may be controversial in 2012, but as the debt crisis comes to a head and every tax dollar needs to be accounted for, Paul's call for a closer look at defense spending will become more mainstream. Article 1 Section 8 of the constitution points out the need to provide for the common defense. But this meant the defense of the United States, not that of the world. It is time to end our role as world policeman, and concentrate on protecting our own citizens.

Will America Become Detroit?

"Neither a borrower nor a lender be"
- Hamlet Act 1, scene 3

"You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store"
- From "Sixteen Tons" by Merle Travis

Detroit News editorial writer Shikha Dalmia has written a sobering op-ed about my former home town's financial crisis. Detroit's leaders seem to be in a state of denial about the severity of the problem. This Op-Ed argues that bankruptcy may be the best option for Detroit, since it would force the changes needed to get the city's debt under control.

It is sad to see what has happened to this once great city, but it is hardly surprising. The city has been spending far beyond either current or projected revenue for many years now. Bowing to political pressure, the city council has been kicking the can down the road for as long as possible. But now, they have run out of road.

But those from other American cities should neither scorn nor pity the city of Detroit. The nation as a whole are following the same trajectory that Detroit followed years ago. So what prevents our country from meeting the same fate as this tragic city? Neither party has offered a serious plan for getting government debt under control. We hear a lot about climate change denialism, but this nation's undoing may well turn out to be deficit denialism.

Wait a Minute! Didn't We Fix This in the 90's?

As late as the last years of the Clinton administration, our government was not running up the deficit. Today, a third of all federal spending is borrowed. How did this our nation go so far wrong in the last 12 years? To answer this question, let us compare the year 2000 budget to this year's budget. Adjusting for inflation (2012 dollars) and population growth,

• In 2000, the government took in $2.5 trillion dollars and spent $2.0 trillion; and
• In 2012, our nation will take in $2.4 trillion dollars and spend $3.8 trillion. 

Revenue is down from 2000, but given how much weaker the economy is now, what is really surprising is that the revenue is not down even further. Spending, on the other hand, has gone out of control. Even after adjusting for population and inflation, spending has nearly doubled. If our government spent at year 2000 levels, we would still have a budget surplus.

In short, the problem is spending, not revenue. But spending cuts are more popular in the abstract than they are in practice, hence neither major party has put out serious proposals for reigning in the red ink.

Is Our Situation That Bad? No, It's Even Worse!

As the national debt clock so vividly displays, the U.S. federal deficit is rapidly approaching $16 trillion. But as stunning as that figure is, it is only a small part of our shared indebtedness. This figure does not include the unfunded liabilities of entitlement programs such as Medicare and Social Security. The unfunded liabilities of these two programs dwarf the $16 trillion figure. The 2012 Medicare trustees report estimates a shortfall of $27 trillion, and the 2012 Social Security trustees report places its unfunded liability at $8.6 trillion. And these trustees reports estimates are on the conservative side!

Another debt problem that U.S. governments, at all levels, have woefully underfunded their pension plans.We have seen the trouble this creates in California, Wisconsin, New Jersey, as well as Detroit. As the baby boom start retiring in droves, this problem will trigger more municipal bankruptcies. And the feds will not have the money to bail them out.

The Lighter Side of Default

We have general agreement that our current spending is unsustainable. Secretary of State Hillary Clinton went so far as to identify the debt crisis as the greatest threat to our nation's future. My next post will look at both party's (wholly inadequate) proposed solutions. But at this point, it is safe to say that, irrespective of who wins in November, this crisis will be dealt with the same way it was in Detroit: at the very last minute, using desperate measures. But cheer up: the impending U.S. default may be very painful in the short run, but it will force some very positive changes in our governance. Follow up posts will explain why the coming storm will be followed by brighter days. Watch this space.

Government Greed

"Be on your guard against all kinds of greed; for one’s life does not consist in the abundance of possessions."
- Luke 12:15"

Money, so they say
Is the root of all evil today
But if you ask for a rise
It's no surprise
That they're giving none away"
- From "Money" by Roger Waters

In many an economic debate, you will find one participant who feels that all our troubles can be boiled down to one word: greed. You've heard this argument before: greed is what drives the profit motive, the basis of free market economies, and that this dependence on one of the seven deadly sins accounts for all our society's ills, including oil spills, stock market crashes, and lousy "Star Wars" sequels. If I had a dime for every time someone given this one word diagnosis, I'd be, well, a successful capitalist.

This one word critique of free market economics is quite emotionally satisfying, but it does not hold up to scrutiny for a number of reasons. The world economic environment is extremely complex, and one word diagnoses generally do not apply to systems more complicated than a food processor. The greed critique of the private sector also seems to make the assumption that, in the absence of profits, people behave in a less greedy fashion. But a number of recent news stories confirm that the public sector succumbs to greed at least as often as the private sector.

For example, many cities and towns use special cameras to ticket drivers who run red lights. These are there for our safety, or so we are told. But multiple studies have recently shown that red light cameras actually increases accidents. When drivers spot the cameras, they frequently slam on the brakes, and this causes more accidents than are prevented by the cameras. In fact, a Dutch city has discovered that they can decrease accidents by a re-design of their roads that does not use traffic lights at all. So how many cities have dropped the red light cameras in light of these studies? Whenever this question is posed to city officials, it is amazing how quickly the topic is changed from safety to how could we possibly replace the lost ticket revenue. So are these cameras used because of safety, or because of greed?

Consider the recent pay scandal in Bell, California, a small, lower middle working class suburb of Los Angeles. The median family income in Bell is only $30,504, but the city residents pay some of the highest property tax rates in the country. When city officials insisted that these taxes needed to be raised even further to keep the city solvent, investigative reporters looked from the L. A. Times looked into city finances. They found that Bell was dramatically overpaying its officials. The Bell police chief earned 33% more than the police chief of Los Angeles. The city manager's base salary was $800,000, almost twice as much as what we pay the president of the United States, and bonuses and other benefits raised his total compensation for last year to $1.5 million dollars. To the poor, over-taxed families of Bell, this looks like greed.

Another case to ponder: in 1992, Massachusetts passed a ballot initiative to increase tobacco taxes, and to use the additional revenue for tobacco prevention programs. Starting in 1993, the state had created an effective anti-smoking ad campaign. The most popular of these ads featured the saga of Pam Laffin, a young woman who was dying of emphysema. The ads traced her various diagnoses, her vain attempt to get a lung transplant, and finally her death that left her two young daughters without a mother. The ads had quite an impact: the number of smokers in the state dropped off faster than the national average. And yet, this successful ad campaign dropped less than a decade later.

Now why did the state drop a program that was actually helping smokers quit? Too expensive, of course. Forget the promise to voters that the tobacco tax money would go to tobacco prevention, the legislators decided that they had better uses for the money. Don't worry that the tobacco tax is highly regressive, for smokers are a politically unpopular group. When tobacco companies benefit from the unhealthful addiction of smokers, we call that greed. So when the state over-taxes these same smokers, why isn't that greed?

These and other examples of government avarice show that the public sector effort to eliminate greed is about as successful as the Puritan effort to eliminate lust. It's not clear if , greed is an integral part of human nature. It is not an issue of whether "Greed is good", the main point is that "Greed is". One virtue of free markets is that they harness greed to some positive ends. For all the moral posturing, It was greed that propelled the tremendous improvements in our PC's (Moore's Law), in our cars, and in our home entertainment (from LP's to CD's to MP3's, from VHS to DVD to Blue Ray).

So the next time you hear someone sanctimoniously boiling down a complex issue to one word ("Greed"), feel free to accuse him of one of the other deadly sins: sloth.

Homeopathy! Apply Directly to the Recession!

"Insanity: doing the same thing over and over again and expecting different results."
- Albert Einstein

"[Groucho] My diagnosis never fails,
I know just what to do,
Whenever anybody ails,
I'm sympathetic too,
My heart within me melts...
[choir] His heart within him melts...
[Groucho] No matter what I treat 'em for,
they die from something else."
- From "Dr. Hackenbush", by Bert Kalmar and Harry Ruby.

A close examination of seeming unrelated topics often reveal some surprising connections. For example, the other night I was looking at youtube videos featuring James Randi, the famed magician and debunk-er of pseudoscience. One of Randi's more popular videos was his explanation of homeopathy, a form of medical quackery that produce the headache medicine Head-On, promoted by one of the most annoying TV commercials of all time. One of the basic principles of homeopathy is the law of similars, which holds that substances that cause healthy people to get symptoms can cure diseases that have these symptoms. For example, a homeopathic cure for a headache would be based on a substance that would induce the a headache in a well person. Who knows, maybe Head-On would work better if its ingredients included a portion of the Head-On ad.

Dr. Stephen Barrett, expert on medical quackery, dismisses the law of similars as a form of "sympathetic magic" without any scientific basis. In the interest of fairness, arguments for homeopathy can be found here.

Both James Randi and Dr. Barrett make a convincing case that the law of similars is rather silly. But the very night I saw the Randi video, I read this Bloomberg opinion piece on the Frank-Dodd housing reform bill. The author of this opinion piece, mortgage finance consultant Edward Pinto, criticizes the bill's list of criteria for prudent underwriting for not including a required minimum down payment nor a good credit history. It is easy to see the political motive for this bill; there is considerable pressure to increase home sales. But wasn't the current housing crisis caused by watered-down lending requirements that caused homeowners to take on excessive risk? The Frank-Dodd bill is basically applying the law of similars applied to the housing market: the policies that produced a downturn in a healthy economy will reverse the downturn in a recession. This is economic homeopathy, and hence economic quackery.

Why do people fall for medical quackery? All too often, the victims of medical frauds suffer from ailments for which there is no remedy. That is a hard prognosis to accept, and hence patients will accept any other alternative, no matter how shaky its scientific foundation.

The same can be said about why voters fall for economic quackery. Many home owners desperately want housing prices to return to the level they were at the height of the bubble. But it is unrealistic to expect housing prices to go that high again, since they far exceeded the value of the house. The cold, hard truth is that there is little that can be done to avoid the economic pain caused by our past mistakes. And no, the pain will not be lessened by an application of Head-On.

For more on the causes of the recession, I strongly recommend the documentary "Overdose: The Next Financial Crisis". In order to understand how the current financial crisis came about, the film makers talked to those few economists who foresaw the housing bust. These same economists warn that our current financial remedies will lead to another, even worse crisis.

The Dismal Science, Gangsta Rap Version

"We are all Keynesians now."
- President Richard M. Nixon

"We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits"
- From "Fear the Boom and Bust" by John Papola & Russ Roberts

Our anemic economy has dominated the news of late, and will almost certainly be the central issue in the November elections. In spite of record stimulus spending, we still have nearly 10% unemployment and sagging housing sales. The debate over this crisis centers around two economists of the previous century, John Maynard Keynes (1883-1946) and Frederic A. Hayek (1899-1992).

• In the book "The General Theory of Employment, Interest and Money", Keynes argues that in times of economic downturns, government spending must increase in order to boost aggregate demand.
• Hayek, Nobel prize winner and author of the 1944 best seller "The Road to Serfdom", argued that excessive government spending could make things even worse by creating perverse incentives and blunting price signals.

Voters would greatly benefit from an understanding of these two great economists. Elites often lament that far too few voters have an appetite for scholarly treatises on topics such as economics, preferring instead to indulge in pop culture. How could Hayek and Keynes possibly compete with "Dancing with the Stars"?

What about combining economics with pop culture? This unlikely idea occurred to fledgling television producer / directors John Papola and Russ Roberts. Concerned about the current downturn, Papola felt that it was important to get these ideas to a wider audience. Papola and Roberts considered several popular culture renditions of the ideas of Keynes and Hayek, finally settling on a rap video. The resulting video, "Fear the Boom and Bust", has been views 1.3 million times on YouTube. It has been translated into Spanish, French, Japanese and Chinese. Economics professors across the globe have shown this video to their classes. The producers have received kudos from both noted Keynes biographer Robert Skidelsky and rapper Kei$ha.

See http://www.econstories.tv for more about this remarkable video that demonstrates that popular culture can actually promote learning.