Globalization and its discontents.

Apple Computer issued bonds last week. Issuing $17 billion of bonds to buy back stock and pay dividends might seem odd for a company that is sitting on an estimated $145 billion of cash, but much of this money was earned overseas and Apple, like many other transnational U.S. corporations, is refusing to repatriate foreign profits because of the tax obligations that would be triggered under the US tax code. Issuing bonds to satisfy shareholder demands was an intuitively illogical, but ultimately financially rational, solution.

The situation is a classic example of moral hazard. Having offered transnational corporations a tax repatriation holiday in 2005--a "one-time" opportunity to bring foreign profits back home for a special, low 5.25% tax rate--corporate America is now holding out for a second bite at the apple, with as much as $2 trillion held hostage in offshore accounts. Cisco Systems CEO John Chambers, whose company's offshore profits approximate $40 billion, threw down the gauntlet recently, stating that Cisco would create no new jobs in the United States until they get their tax holiday.

China has been the largest beneficiary of the offshoring of jobs by U.S. corporations that have produced the trillions of dollars in question. Yet despite seeing millions of workers lives lifted out of extreme poverty, the Chinese are not happy. They believe that they--like the U.S. treasury--should be entitled to a cut of those profits. After all, if Chinese workers actually owned the means of production, much of that lucre would belong to them. Instead, China's take has been limited to the jobs that have been created, along with whatever amounts were skimmed off along the way for the personal nest eggs of Chinese officials.

The Apple bond sale came just two weeks after the spring meeting of the International Monetary Fund, a gathering that focused on the eradication of extreme poverty and where, as reported by Annie Lowery in the New York Times Magazine, World Bank President Jim Yong Kim pronounced 2030 as "the global target to end poverty." Kim's optimism comes on the heels of the success of the world community in cutting the share of the world population living in extreme poverty by fifty percent, five years ahead of the target date of 2015 establish a quarter century ago, as the rate fell to an estimated 21 percent in 2010, from 43 percent in 1990.

The linkages between the two events--profits earned by U.S. corporations overseas and the amelioration of extreme poverty as defined in official statistics--is not something that is widely embraced in the development community. Indeed, the New York Times article is quite revealing in its conclusions. "For much of the improvement, the world can thank one country: China, which alone accounts for about half of the decline in the extreme poverty rate worldwide. It has also driven significant gains across the region. In the early 1980s, East Asia had the highest extreme-poverty rate in the world, with more than three in four people living on less than $1.25 a day. By 2010, just one in eight were."

China? The rise of the Asian Tigers--Singapore, Taiwan, Korea, and Hong Kong (then still a British colony) from destitute poverty to affluence came long before China decamped from its faith in the Little Red Book and began its journey down the capitalist road. It is striking that the same newspaper that won Pulitzer Prizes for its reporting on the offshoring of American jobs to and related corruption in China could showcase a piece on the global decline in extreme poverty without even a nod to the American middle class that made it all possible, and paid the dearest price.

Neither the Time's article--nor for that matter the communique published in the wake of the IMF meeting--ever once mention the word "trade", yet it has been one of the driving forces in global economic development over the past several decades. The alleviation of poverty in China and India--the countries that data suggest have seen the greatest alleviation of extreme poverty--is in particular a direct result of the U.S. embrace of free trade. The rise of the Asian Tigers was based on the export-driven development model that raised Japan up out of the ashes of World War II, and that was subsequently replicated across much of the rest of Asia. The Times article cites the population migration in Cambodia as an example of where extreme poverty has been reduced. "Cities bolster access to health services and public resources; infant-mortality rates, for instance, are 40 percent lower in urban Cambodia than in rural Cambodia. And workers themselves become more productive, often by making the switch from labor-intensive work like farming to capital-intensive work like manufacturing." Yet there is no suggestion of the global economic changes that enabled that transformation.

A national export-driven economic development strategy requires two essential elements. First, one or more trade partners willing to accept trade imbalances--to import more from than they export to the country in question. And second, a stable, if not pegged, currency relationship, which is necessary to ensure that the intentional trade imbalances do not result in the appreciation of the export country's currency, thereby increasing the cost of their exports and undermining the export strategy. But for the willingness of trade partners to support large trade imbalances with Chinese--and tolerate the attendant destruction of domestic employment--China's dramatic economic growth would not have been possible. Indeed the relationship described by the New York Times article is inverted: The world need not thank China. Rather, China should thank the world.

U.S. leadership in the promotion and support of global trade has been essential to the alleviation of extreme poverty. While Europeans have for years evinced a deep disdain for American capitalism and imagine their system to be more compassionate, the European polity has steadfastly resisted the national sacrifice that stronger measures in support of open trade with developing nations would require. The French continue to resist opening their agricultural markets to Portugal and Greece, much less to African nations, while Germany has shown no appetite to undermine its own manufacturing export machine that other nations might benefit. Only in America would politicians forsake their middle class constituents and vote for free trade agreements to the benefit of their industry contributors--and the developing economies of the world.

In 1992, Ross Perot famously described the giant sucking sound of American middle class jobs that would be lost in the wake of free trade. And he was correct: In the two decades that ensued, millions of American jobs were lost as entire industries shifted production offshore. But over the same period, as celebrated at the IMF summit, hundreds of millions of people across the globe have seen their lives lifted up  out of extreme poverty.

Companies such as Apple and Cisco Systems, and nations such as China, that have benefited from free trade are part of a closed system that has been built in large measure on the strength and confidence of the U.S. consumer. Yet those beneficiaries have been largely indifferent to the plight of the American middle class--whose economic well-being and confidence in the future has been undermined by the expansion of free trade--focusing instead on their own self-interest and entitlement to the benefits of trade. The leaders of Apple and Cisco gripe about tax rates, while the leaders of China disdain American concerns for their predatory trade practices.

If the world is to sustain the momentum of economic development that is essential to Jim Yong Kim's optimism, the companies and countries that have benefitted from expanding free trade have a collective stake in figuring out a path forward that stanches the downward spiral of the American middle class. Failing that, the political coalition that has promoted free trade to date will ultimately unravel, as an increasing number of Americans adopt the stance of the leaders of Apple and Cisco and China, and decide that it is time to ignore the interests of the rest of the world and just pay attention to their own self-interest.

Our enemy.

When I sat down to write this morning, I did not want to write about the Boston bombing and the ensuing manhunt. What was there left to be said? And yet, we know next to nothing.

I badly want to hear Dzhokhar's story. He was a classmate and friend of a close family friend in my native Boston, and by all accounts, did not "come across as someone who would do anything like this."

But who does? In the recent debate over gun control, people spoke with ease about denying purchases to the mentally ill, but is that so easy to define? Growing up in a family of psychotherapists, I found that debate somewhere between ludicrous and horrifying, as the mentally ill were presumed to be a new category of the "others" that have long been the source of so many of our ills. The conflation of despicable acts with mental illness, and the ensuing belief that if we identify mental illness we can limit atrocities is somewhere between wishful thinking and utter denial of a much more threatening reality.

I do not want to hear Dzhokhar's story to understand it, or to feel empathy, or forgiveness. The events at the end of the Boston Marathon were horrific. In a way, the magnitude of the maiming--runners who came to run a race and left with no legs--outstripped even the death. Scores left with limbs lost and lives forever changed. There is nothing he can say to make us understand the wanton cruelty of his and his brother's act, no personal story nor political rationale that will make us sit up and say, "Yes, I get that."

In his essay Inventing the Enemy, Italian essayist Umberto Eco describes the need for defining the other as the enemy as an enduring part of what binds societies and peoples together. His is not a judgement, but an observation.

"Trying to understand other people means destroying the stereotype without denying or ignoring the otherness. But let us be realistic, these ways of understanding the enemy are the prerogative of poets, saints and traitors. Our innermost impulses are of quite another kind."

Growing up in Boston was to feel the constant animus between communities that together comprised what to the outside world was a great cultural and intellectual capital. To paraphrase Tom Lehrer, the great Harvard mathematician and humorist, the white folk hated the black folk, the Irish hated the Italians, the Catholics hated the Protestants, and everyone hated the Jews.

The hatreds in Boston were very real, and the rage lay just beneath the surface. And they boiled over in moments such as when Louise Day Hicks led her community of the white working class to protest the racial integration of public schools. It was the Other that bound us together. We all hated the Yankees, the Canadians (the team, not the people), and the Lakers.

Despite the years since 9/11, and despite the years of watching Palestinian bombs killing indiscriminately on buses and in cafes in Israel, the bombing in my hometown last week gave me a visceral understanding of British national anger at the Boston Irish community--led by the Kennedy family--lending financial and moral support to the IRA, whose bombs were as indiscriminate in their slaughter and maiming. It gave me an understanding of a Russian friend's anti-Chechen animus for years of similarly indiscriminate bombings in Moscow.

I want to hear Dzhokhar's story because of the rage that I grew up with, that I inherited from my father as literally as DNA is passed down from one generation to the next. My father's rage was more consuming of his life than mine. For me it comes only in moments, and it passes, but it is consuming in those moments. I have experienced it as a vestige of the immigrant experience. His parents came from Russia, 1,000 miles north and a bit west of Dzhokhar's family home. I have often commented that the dislocation of that migration took four generations to dissipate, as I imagine that my children finally and fully experience life without the rage I experience.

Eco's fundamental observation is that we define ourselves by who our enemies are, that civil society relies upon the presence of the other as a central organizing principle. A week ago, before Boston dislocated my thinking, it occurred to me how much easier it was to be President during wartime. Bill Clinton was the first President of my lifetime who governed without a significant war, and since the collapse of the Evil Empire, the need for a new enemy has been tangible in our politics. Eco talks about the millennial anticipation of the Anti-Christ as an animating force in Christendom and Europe's slow evolution to its modern form, and we watched over the past two decades the labeling of our adversaries as the Anti-christ, including Saddam Hussein and Mahmoud Ahmadinejad.

In the absence of definable enemies, as I learned in Boston, we turn on each other. Perhaps it is only with the waning of the wars of my youth that this has become so apparent in our national politics. Now, Democrats and Republicans have turned on each other in the absence of a common enemy, with new permutations of class warfare where it is the wealthy who resent the poor, and where our President is the Anti-christ. We have taken the art of cultivating resentments and channeling hatreds to new heights, across multiple new platforms.

I want to hear Dzhokhar's story because his and his brother's assault was so deeply personal, in a way that was obscured in 9/11 by the large scale nature of that tragedy. He chose to place bombs in crowded places. His action was both personal and impersonal. His life story as written across the web and in the words of those who knew him lacks a sense of animating rage.

I want to know how he took the step that so few take, to turn on one's enemy and in a deeply personal act inflict horror upon them. Defining this as the action of the Other--one more Muslim Salafist driven by religious rage against modernity--is not enough. This was a personal act. I have to believe that there is something there that makes Dzhokhar different, because it is too threatening to think that there isn't.

Ben's choice.

When former Reagan OMB Director David Stockman charged Ben Bernanke with  “exploding the Fed balance sheet” in his recent New York Times op-ed piece and in various interviews on his book tour, he was tapping into a topic rife with controversy and skepticism. Few areas of our politics are as rich with conspiracy theory in the public imagination as the workings of the Federal Reserve Bank.

Ben Bernanke has been a stalwart of federal economic policy since the 2008 collapse. While most of the original crafters of TARP and the bailouts of the banks are off writing their memoirs, Bernanke has soldiered on. Someday, perhaps, history will credit him with guiding the U.S. economy—and in its wake the rest of the world—through a treacherous time, but that time has not yet come.

From a certain perspective, Bernanke has done an admirable job. After all, while the rest of the advanced industrialized world—notably Europe and Japan—continue to struggle to find a path to growth, the U.S. economy is growing—albeit at a slower rate than in prior recoveries. And for all the continuing anger at the financial sector, the U.S. banking system has returned to viability, while European banks in particular continue to navigate a precarious path forward. Every month we see new evidence of the long, slow implosion of the Eurozone, while Japan’s failure to escape its long-running recession is now the stuff of legend. Meanwhile, flight capital from the rest of the world’s continues to strengthen the dollar as the reserve currency of the global economy and push U.S. Treasury yields to historic lows.

There are two particularly crimes that Stockton and others lay at Bernanke’s feet. The first is the impact of keeping short-term interest rates near zero. Facing the disinclination of the Congress and the U.S. public to recapitalize the banking system directly, Bernanke has used monetary policy to achieve this outcome. It is now (somewhat) widely understood that one of the primary objectives in keeping interest rates low has been to allow a “carry trade” whereby banks borrow funds from the Fed at near zero cost and purchase higher yielding U.S. Treasury securities, and earn a spread that flows through their earnings to rebuild bank assets that were destroyed with the collapse of housing bond values.

The consequence of this, as Stockman and many others have pointed out, is that it has enriched the banks while impoverishing the elderly, worker retirement systems and other savers across the economy. Our parents and grandparents who live off their savings have seen interest earnings on certificates of deposit decline from the range of four or five percent to below one percent. Similarly, the now-critical underfunding of public pension systems—which were universally fully funded a decade ago—is in part a direct result of Federal Reserve interest rate policy.

Bernanke, as Fed chairman, had to make a choice, and he did. Keeping the Fed Funds rate at near zero has had little to do with stimulating bank lending—and indeed the lack of lending is a major criticism of the banking system—but rather it has been to rebuild bank balance sheets that were destroyed with the 2008 collapse.

This focus on rebuilding the balance sheets of our largest banks parallels the second charge leveled at Bernanke. The Federal Reserve Bank balance sheet has grown significantly since the 2008 collapse. At the end of August 2008, just before the ensuing September crash, the Fed balance sheet showed assets and liabilities (which are equal in the language of Fed accounting) of $909 billion. Four and one-half years later, as of March 27th, Fed assets and liabilities had more than tripled, to $3.2 trillion. During this time, bank deposits with the Fed (shown as liabilities on the Fed balance sheet, because the they are assets of the depositing banks) grew from a negligible $19 billion to over $1.8 trillion.

For most people in the world, the previous paragraph is largely incomprehensible, so a few comments on monetary economics is in order.

As the U.S. central bank, the primary role of the Federal Reserve Bank is to regulate the money supply. That is to say it literally manages the amount of money that is in circulation. At the upper edge of every U.S. dollar bill are the words “Federal Reserve Note,” indicating that the dollar is “fiat” (or paper) currency issued by the Fed. Historically, the primary objective of the Fed has been to control inflation, though in recent decades it has been charged as well with keeping unemployment at acceptable levels. An essential premise of monetary economics is that a rapid increase in the money supply will necessarily lead to an increase in inflation, based on the very simple notion that if there are more dollars floating around purchasing the same amount of stuff, the price of stuff will rise as people throw more dollars at it.

Traditionally, one of the primary ways that the Fed increases the money supply is to lend money to the banks that are members of the Fed system, which they would then lend out to private borrowers. This has the effect of putting that money into circulation in the economy, and by lowering the cost of money (the Fed Funds rate) the Fed can increase the amount of lending. But as an alternative, when there is little borrowing going on at any price--such as during the current period of massive private sector de-leveraging--the Fed can put new money into the economy is by purchasing securities from banks.

This practice, generally referred to as quantitative easing, allows the Fed to put new money into circulation even if there is little private lending going on. Here is how it works: If a bank owns a bond and sells that bond to the Fed, the Fed literally pays for that bond by creating currency that it gives to the bank in exchange for the bond. One day, the bank owns $1 million in bonds, the next day it has $1 billion in cash. After that transaction, the Fed has a new $1 million in assets (the bonds it purchased) while the bank has newly minted money. On the liability side of the Fed balance sheet, the Fed shows that $1 million as either bank deposits, if the bank is not planning on lending that money out in the near future, or bank notes, similar to those in your wallet. (Just to close the circle, should the Fed want to slow down economic activity and inflation, it would do the opposite, selling securities to banks, effectively taking cash out of circulation and reducing the liquid resources available to the banks for new lending.)

Based on the Fed balance sheet numbers noted above, in the post-2008 period, the Federal Reserve has “inflated” the money supply by around $2.3 trillion. According to Bernanke detractors, this growth in the money supply must necessarily portend disaster. The accusation is that Bernanke is pumping up the money supply in order to “monetize” or devalue, the debt of the government. The monetization of debt constitutes nothing less than the expropriation of savings from the virtuous, and Bernanke’s actions will ultimately result in the impoverishment of America, suggesting images of Weimar-era Germany.

But there is an alternate perspective.

Back in the spring of 2008, I happened to be in the offices of Bear Stearns the day that its sale to J.P. Morgan was announced. The collapse of Bear Stearns marked the beginning of public discussions of the magnitude of bank losses in bad housing bonds that would ultimately lead to the passage of the $700 billion Toxic Asset Relief Program, or TARP. A colleague of mine, a very bright guy named Andre, made the casual, yet prophetic, observation, that aggregate losses across the U.S. banking system in bad housing bonds was far greater than the hundreds of billions of dollars then being discussed, and would ultimately be in the range of $2 to 4 trillion dollars. (I remember the conversation well because it was the first time I heard the word “trillion” used in casual conversation).

Andre’s casual prediction that Spring day has turned out to be an accurate demarcation of the range of bank losses in the 2008 collapse. These were real losses in real dollars from the asset side of the U.S. banking system. In some cases, U.S. banks have recognized (an accounting term that loosely translates into “admitted to”) these losses, while to a great extent accounting rules have allowed banks to defer loss recognition, so these bonds remain on the books. The TARP program, incidentally, was a complete failure specifically because it would have required banks to recognize the magnitude of their losses.

Ultimately, Andre’s $2 to 4 trillion dollar estimation of losses mirrors the amount of value that Bernanke is seeking to restore to bank balance sheets. Bernanke has essentially broadened the role of the Fed from managing inflation to assuring the viability of the banking system. His primary tool for doing this has been “quantitative easing,” a practice widely viewed as a means of managing the money supply in a period of low loan demand, but which is being used by Bernanke as a means to recapitalize banks, increase their liquidity and restructure the risk profile of their balance sheets.

The extent of Bernanke’s success to date can be seen in the $1.8 trillion of bank deposits referenced above. According to this perspective, what detractors view as excess money supply creation can be seen from Bernanke’s view new money channeled onto bank balance sheets necessary to replace the assets that were lost in the 2008 collapse and thereby restore solvency to the national banking system. In this view, the $2.5 trillion growth in securities held by the Fed reflects its success in converting long-term assets on the books of private banks to cash, and thereby reducing the aggregate duration of bank assets and further increasing bank liquidity.

Bernanke detractors are unarguably correct on one score: Fed policy of keeping the Fed Funds rate near zero was a policy choice between the interests of the banks and the interests of savers across the economy. The destruction of the solvency of senior citizens and pension funds was deemed by Bernanke to be acceptable collateral damage of policies designed to save the nation's largest banks.

Bernanke faced a dilemma of the sort that few public officials are ever forced to confront. Neither the banks nor the political system were prepared to take the steps necessary to stabilize the banking and economic system. The banks that held the toxic assets that effectively made them insolvent steadfastly refused to sell those assets as envisioned by the creators of the TARP program, while our politics made the nationalization of those insolvent banks a non-starter. Bernanke was clearly of the view that a collapse of several major banks was for all involved the worse outcome than the destruction of the savings of millions of people across the economy, and he acted accordingly.

David Stockman blames Bernanke specifically for making a choice that destroyed the virtuous at the expense of the profligate, and so he did. But the predictions after the fact by Stockman and so many others about how much better off we would be today if instead the banks had been allowed to fail are easy to make but impossible to prove.

But the “exploding the Fed balance sheet” debate is one for which we ultimately will have an answer. If Bernanke’s strategy of recapitalizing the banking is ultimately successful, the $2 trillion or so of new currency created under his watch will ultimately come to replace bank assets lost in the 2008 collapse, restoring solvency to the banking system but resulting in little material net increase in the supply of money in circulation. If Bernanke’s detractors are correct, those trillions of dollars will instead become the source of new and uncontrollable inflation. This is an empirical question, and the answer will largely determine how history judges Ben Bernanke.

Handmaidens of our sorrows.

The New York Times published op-eds last weekend by David Stockman and Jeffrey Sachs, each once luminaries on the national and international stage. Both wrote with a passion that befitted their once lofty status, and yet each seemed to demand our attention, beseeching us to heed his unique wisdom, perplexed that we pay him such little regard.

David Stockman wrote of the irreversible decline of America like a man possessed. In what surely must be a précis of his recently published book, Stockman goes on for 2,700 words about the collapse of America. It is a historical ramble, going back to the New Deal, cataloging the criminal failings of monetary policy and the bi-partisan destruction that our politicians have unleashed on everything that once made America great. Don't get me wrong, I have my moments of being a schoolmarmish debt scold and find in Stockman a soul mate of sorts in his understanding of the deep-seated corruption that has aided and abetted the financialization of our economy to the detriment of the common weal. But his is the writing of a man on the verge of a nervous breakdown.

Sitting at the opposite end of the political spectrum, Jeffrey Sachs makes observations that are very similar to those made by Stockman. He too sees an economy in decline, one that has failed the middle class and that is systemically unable to compete with the rising global economic powers. But unlike Stockman--who concludes that America has reached "end-stage metastasis" and with despondency concludes that there is nothing to be done because "the way out would be so radical it can’t happen"--Sachs mirrors Stockman in his litany of the ills that afflict us, but then offers up surprisingly small bore solutions. Where Stockman would undo the corrosive intertwining of politics and commerce that have characterized western civilization at least since Niccolò Machiavelli was the advisor the Medici family, Sachs proposes a prescription of increased investment in transportation infrastructure, solar and wind power, and job skills training. Where Stockman is unrelenting, Sachs is decidedly unconvincing.

Stockman and Sachs are not strangers to charting the course of radical economic change. Stockman was a leading figure in the Reagan Revolution--where he served as Reagan's Director of the Office of Management and Budget--implementing the supply-side economics and "deficits don't matter" policies that are now the target of his critique. Indeed, in the midst of a rant that casts the net of blame widely, Stockman excuses only himself, offering his version of Captain Louis Renault's apologia--I am shocked, shocked to find that gambling is going on in here--telling us that he resigned as OMB Director when he perceived the "destruction of fiscal rectitude under Ronald Reagan." But he offers this with no sense of irony that the policies that he eagerly embraced in his 30s are the very ones that three decades later he now sees as central to our national decline.

Jeffrey Sachs’ revolutionary moment came almost a decade after Stockman. Like Stockman, Sachs was in his mid-30s when, as a Harvard economist, he served as an advisor to Mikhail Gorbachev and then Boris Yeltsin during the end stage of the collapse of the Soviet Union. While Sachs has denied his complicity in the massive theft of Russian natural resource wealth that ensued, the privatization of Russian industry that was central to the Yeltsin-era economic program became the engendered the rise of the Russian oligarchs.

The death of Boris Berezovsky last month in the wake of legal battles with Roman Abramovich was a stark reminder of the enduring fortunes that were created in the chaotic end of the Soviet Union. While Bloomberg News describes Berezovsky as a self-made billionaire, this is a charitable description. Berezovsky and Abramovich together acquired Russian state-owned oil assets that then comprised one of the world's largest oil companies for literally pennies on the dollar, an opportunity made possible only by the tragic mix of the deep corruption of the Russian state and the intellectual firepower of the Boris Yeltsin's advisory team, of which Jeffrey Sachs was a prominent member.  Using words that evoke Stockman’s, Sachs resigned from Russia after a few years, having "found corruption to be growing and out of control."

In a way, Stockman and Sachs were each naifs whose intellectual capabilities fell prey to the political will to power. Jeffrey Sachs engaged in the world of international economics at a unique moment and crafted strategies for the complex restructuring of failed socialist economies. But where Sachs saw a theoretical path to recapitalizing a bankrupt economy, the Boris Yeltsin’s coterie of kleptocrats found a means to amass unimaginable personal wealth. No doubt Sachs was shaken to see how well intended advice on how to bring new capital into the failing Russian economy could be turned to personal and political avarice.

For his part, when David Stockman was at the height of his power, he was wont to say that he understood how the world worked. It was a notion that was central to his youthful arrogance. But like Sachs, Stockman did not understand the world he was in as much as he thought, and in large measure, the destruction of fiscal rectitude that he so decries came on his watch. Stockman failed to see how legitimizing unbalanced budgets would completely transform our politics, how it relieved Congress of the singular duty for which they are elected: the duty to make choices. Henceforth, they would not have to choose between cutting services or raising taxes, they could have it all, and increase services and entitlements even as they cut taxes.

As a young man in his 30s, David Stockman offered the intellectual rationale for the fiscal profligacy that he now decries as the source of our demise. As a young man in his 30s, Sachs became an intellectual superstar on an international stage, only to be humiliated as the co-creator of the greatest theft in world history. They each write with a passion about the problems facing our country today, yet each seems to wonder why no one seems to be listening. Perhaps it is because neither talks honestly about the role he played in what each clearly sees as a tragic moment in our history.

Stockman and Sachs each helped to set in motion historical forces that plague the United States and Russia to this day, and in each case it was because of the unintended consequences of making large scale changes in highly complex economic and social systems. Our economy today has been beset by the consequences of a number of deliberate public policy initiatives, including free trade, financial services deregulation, and education reform, that each have had and continue to have dramatic and adverse impacts on our society and our economy that were not intended by those who supported those changes.

The deep pain and tragedy of unintended consequences are experiences that Stockman and Sachs share, and that they each carry with them to this day. We need them to write about that, because that is where they have the greatest insight to offer, and the side of their stories that people most need to understand.

The oldest story in our Republic.

March was an big month for the big banks. Little by little, the tragedy of Sandy Hook Elementary School is fading into memory, and the NRA and the gun lobby are proving themselves more than capable of staving off legislative reforms that according to public opinion polls enjoy broad public support. With the withering of gun reforms, the power of political money and the ability of special interests strategists to drive wedges between Red America and Blue America is once again proving out.

And why do the banks care? Because slowly but surely, people are coming around to the understanding that there is no solution to the concentration of risk in our financial system that does not begin with reducing the size and market share of our largest institutions. And only the political muscle of the financial industry lobby--manifest in political contributions and lobbying prowess--can continue to thwart this emerging consensus.

Two weeks ago, the President of the Dallas Federal Reserve Bank, Richard Fisher, spoke his mind as he said that the time has come to dramatically reduce the size and market power of our largest banks:

"Here are the facts," Fisher said. "A dozen megabanks today control almost 70 percent of the assets in the U.S. banking industry. The concentration of assets has been ongoing, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. The result is a lopsided financial system. Today, these megabanks—a mere 0.2 percent of banks, deemed candidates to be considered “too big to fail”—are treated differently from the other 99.8% and differently from other businesses. Implicit government policy has made the megabank institutions exempt from the normal processes of bankruptcy and creative destruction. Without fear of failure, these banks and their counterparties can take excessive risks." 

Fisher went on to cite the estimated $50 to $100 billion in annual subsidies reaped by these largest institutions, to the detriment of the 5,570 other banks across our economy upon whom our economy relies for the depository services and lending that is so critical to a healthy private sector and economic growth.

Richard Fisher's speech came on the heels of a report issued a week earlier by Democrat Senator Carl Levin and Republican Senator John McCain on the "London Whale" trading losses at J.P. Morgan. The Levin-McCain Permanent Subcommittee on Investigations report suggested the need "to tighten oversight of banks’ derivative trading activities, including through better valuation techniques, more effective hedging documentation, stronger enforcement of risk limits, more accurate risk models, and improved regulatory oversight." The report, however, documented the practical impossibility of implementing the needed reforms as J.P. Morgan traders had proven their ability to hide losses from internal monitoring for months at a time, to breach bank-imposed risk limits, to manipulate risk evaluation models, and to "dodge or stonewall" regulatory oversight.

The imperviousness of large financial institutions to effective risk regulation is not news, and was argued persuasively by Greenlight Capital President David Einhorn in the months before the 2008 meltdown, yet a half a decade has passed and next to nothing has been done to mitigate trading risk and temper the unchecked derivatives exposure that continues to threaten the commercial banking system.

The conflict between the interests of the banks and the public interest is as old as the Republic. Popular distrust of Wall Street runs deep, and historically has been a conviction held across the political spectrum. In his speech, Fisher highlighted bi-partisan concerns over the issue, citing the McCain-Levin partnership as well as such odd Senate bedfellows as Democrat Sharrod Brown and Republican David Vitter finding common cause in asking the Government Accountability Office to quantify the hidden subsidies to our largest financial institutions.

To date, however, the industry has been effective in deflecting concerns over the growing concentration of financial risk and power. After the initial public anger in the wake of the 2008 collapse, the narratives that have survived the financial crisis are strongly partisan. While there continues to be periodic public clamor over how it is that no one went to jail related to the 2008 financial collapse, public debate about bank system risk has now been effectively subsumed into our larger political wars, essentially derailing any significant discussion of financial restructuring as Richard Fisher suggests.

But even as each side has their own narrative assigning blame for the 2008 collapse, no one can seriously argue two basic facts. First, as Richard Fisher points out, the size of our largest banks means that they are--financially and politically--to big to fail. Should J.P. Morgan or Goldman Sachs teeter on the brink, threatening the collapse of the globally interdependent financial system, the governments of the world will demand action, and the central bankers will take all necessary measures to prevent massive bank failure. Second, no regulatory regime can hope to monitor and control bank risk-taking to the extent recommended by the Levin-McCain Report. The only prudent path to mitigating systemic risk is to reduce the size of our largest banks, as Fisher has argued.

For all the power of the financial industry, parallels with the anti-gun lobby may lack salience, as financial reform is a fundamentally different issue from gun control. While there are real differences in public attitudes about gun ownership and government regulation, there are fewer such differences on matters of bank size and derivatives risks among the general public. Few at any point on the political spectrum believe that there is any inherent public benefit in continuing to increase the market share of our largest banks, and fewer still argue the essentiality of the $639 trillion of financial derivatives to our economic recovery. Rather, critics on the right and the left have consistently argued that the concentration of power in a few large banks constitutes a threat to the vibrancy of our commercial banking system, and the growing profitability of the financial sector over the past decade or more has created a very real brain drain from the productive sectors of the economy to a non-productive sector.

The bulwark against bi-partisan action to address the continuing threat of concentration in the financial sector is money, specifically the $1 billion of annual spending by the financial services industry in lobbying and political contributions. The contributions of the financial industry exceed any other industry, and the names of the largest donors come from that same subset of banks that are working hard to protect the deposit insurance, the unregulated derivatives trading, and the scale that combine to produce implied federal protection that reduces their cost of capital, increases their potential leverage, and enhances their profitability and executive compensation.

Distrust of Wall Street has long been an issue of equal passion on the left and on the right, but one that has been obfuscated successfully by the consensus of senators of both parties whose votes have been bought and paid for. While it is popular to decry analysis that blames both parties for the problems we face, this is an issue on which neither party can claim the moral high ground. The Republican Party has historically been the party of Wall Street, but it was Bill Clinton who did the most damage as he promoted financial deregulation at the end of his term.

While a majority of Senate has been bought and paid for, the left and the right, and specifically the Occupy Movement and the Tea Party, have much in common on this issue. Pundits on the left were too quick to ignore the anti-corporatist strain within the original Tea Party movement, which was in its inception anti-banking and anti-corporate power. Charles Koch's 2011 editorial in the Wall Street Journal said as much, but was quickly dismissed because it had the Koch name on it. But Koch's message--that corporate power over federal spending and regulation is damaging to the public interest--could have equally been delivered by an activist on the left as on the right. But instead of finding common ground, each side weakened themselves by ignoring the potential for uniting around common instrests.

Perhaps the greatest success of the bank lobby has been its success in pitting the right and the left against each other to undermine a broader understanding that the status quo is neither in the public interest nor necessary for an effective financial system. Richard Fisher's speech made an argument that is essentially non-partisan and rational. The problem is that the banking industry strategy has been effectively bi-partisan and politically masterful. They have bought the center, and can watch contentedly as pundits of the left and the right scream at each other on MSNBC and Fox even as the concentration of financial power and risk grows largely unabated.

The end of the Age of Bush?

The Supreme Court arguments regarding California's Proposition 8 and the Defense of Marriage Act has been a remarkable moment for our society to recognize the degree of movement in social attitudes on a once highly contentious issue. In a manner unimaginable just a decade ago, leading Republicans have spoken out in support of gay marriage. 

Two of the protagonists of the culture wars of the 1990s, Bill Clinton and former RNC Chair and W. aid Ken Mehlman have each expressed their regret for their past actions, Clinton for signing DOMA and Mehlman for participating in gay baiting political tactics. Both framed their prior actions as the price of pursuit of victory over principle.

Jeb Bush, an erstwhile 2016 contender, is struggling to locate himself on the principle vs. politics scale. Clearly rusty after a layoff of almost a decade since his last campaign, he has re-emerged into a Republican Party that has lost its bearings. Jeb's father, George H. W. Bush, grew up in a New England Republican political family, and represented a GOP that is almost unrecognizable today. Poppy signed on to the Revolution, but was never a true believer, and was ultimately dispatched to an early retirement by the supply-siders and the Reaganites. By the time Jeb's brother W. seized the torch, the GOP was the domain of the self-styled "values" voters, whose visceral clinging to their religion and guns created a dominant political force. Jeb seems to want to be his Dad, a prudent, cautious Republican of the old school, but the Republican landscape is no longer welcoming of his father's softer demeanor. Jeb needs an edge, but it is not coming easily.

A few weeks after stumbling over the immigration issue, changing his stance several times within a day or two, Jeb Bush apparently decided to hunker down on the issue of gay marriage, declining to join the parade of Republican heavyweights signing up in support of a more tolerant nation. Speaking this week about gay marriage and gun control, a visibly chastened Bush retreated from taking any positions on anything, providing instead a magnificent formulation of political non-speak: "The effort ought to be to find consensus, that there should be rewards politically for a consensus-oriented approach that solves problems. On the other hand, passing legislation that doesn't solve the problem isn't going to solve any problems, either. I'd be wary of simple solutions to complex problems. This is a complicated issue." 

Some issues are complicated. But often they only become complicated only when politicians are forced to choose between their own sensibilities and fears of political consequences. If Jeb wanted to seize the incrementalist center, and claim some kind of Yoda-like mantle of wisdom, he might have referred back to Justice Ginsberg's reflection on Roe v. Wade having been decided too soon, and the importance of letting a national consensus grow prior to the Court asserting itself. Not exactly a Lincolnesque strategy, but it would beat the vacuous response he came up with.

In the wake of the Conservative Political Action Committee convention, it has become conventional wisdom that the Republican Party now rests in the hands of Rand Paul and Marco Rubio. Rand Paul jumped to the fore on the issue of domestic use of drones, taking a stance that would have ignited the political left were an earlier Bush still in the White House. Republican fascination with Rubio seems somewhat overdone, as he has yet to deliver a notable speech or show particular leadership, beyond the issue of immigration where his leadership remains to be validated by visible evidence of followership across the party he purports to lead.

The depth of the animus that divides Ds and Rs has been remarkable in the effective censoring of cross-party alliances, even where there should be strong affinities, whether of politics or principle. Ron Wyden's support of Paul's filibuster should have found broad support on the left, as nothing could offer a more daunting foreshadowing of an encroaching national security state than the image of drones policing first our borders and then our cities. The President's casual response "Not yet" to Senator Paul's question about whether he had authorized the domestic use of drones may have sounded like the tongue-in-cheek remark of a man enjoying baiting an adversary, but seemed misplaced given the gravity of the topic.

But if Paul and Rubio were the stars of the party, Sarah Palin's reemergence as the belle of the CPAC ball was a stark reminder of how far the GOP has fallen. This was once the party of laws and order. Candidates waited their turn and did not show up the central command. The battles between the right and the farther right--Goldwater and Rockefeller, Reagan and Ford--were largely resolved out of the public eye. By contrast, today's Republican Party is in uncharted waters, and for the first time in decades, there is no simple template. For the first time since Ronald Reagan trounced Poppy Bush, the shibboleths that emerged in Reagan's name are withering.

Jeb Bush is supposed to be the grownup. He is governor with gravitas and substance in a party now deeply in need of both. Marco Rubio and Rand Paul make for good copy, but neither is going to be the GOP candidate three years from now. The Republican Party bench is in disarray, and Jeb may well be the Party's most viable candidate.

After a bad first month, Jeb Bush may decide that he does not have the fire anymore, that he is not willing to take on the peasants with pitchforks that undid his father or bother with the lunacy of Sarah Palin's act or entourage. But he has a real opportunity. For the first time in decades--perhaps since his father denounced Ronald Reagan's voodoo economics in the 1980 primaries--the old Republican playbook has run its course. In the chaos of today's GOP, Jeb Bush can actually write his own script, he can say what he really believes. But so far, that possibility has not sunk in. Because so far, he has not said anything at all.

Measures of economic performance.

There is a debate raging of sorts in the economics community. Are we in a recession? On one side--claiming that economic data does not suggest that we are in a recession--is a large swath of the economics community. On the other side, feeling the slings and arrows of his colleagues derision, is Economic Cycle Research Institute founder Lakshman Achuthan. Achuthan suggests that the U.S. job growth is in decline, a stance that may be contradicted by official data but reflects the real world experience of many Americans.

Debates within the dismal science are usually quiet affairs, but this one has gone public, complete with a Youtube Hitler parody of Achuthan. But even as Achuthan has been increasingly ridiculed for his unwillingness to back off his contention that the U.S. economy is in a recession, the debate has raised a more fundamental question about the nature of economic measurement and the effectiveness of the current economic model in meeting a primary objective of producing the greatest good for the greatest number of people.

The problem of measurement is most dramatically apparent in Europe, where the return to recession was generally recognized three months ago. While recent projections suggest a deepening recession in Europe, the official data are nonetheless a stark contrast with the facts on the ground. This is particularly apparent in Spain, where projections of a 0.7% annualized rate of contraction would seem to dramatically understate the severity of the economic problems in a country with an official unemployment of 26%, where youth unemployment exceeds 50%, and where in the words of Citigroup chief economist Willem Buiter, the primary practical job seeking strategy for young Spaniards has become to leave their own country.

In the years since the 2008 economic collapse, by all measures, the United States has fared far better than Europe, where the inherent tensions between monetary integration and political independence have led to a dysfunctional polity, and labor market rigidity has created undermined economic adaptability. Yet since the collapse of the housing bubble five years ago the dichotomies within the post-Cold War U.S. economic model have become increasingly apparent.

At the same time as Europe has fallen back into recession, U.S. corporate profits have hit record highs as a share of GDP and this past week the Dow Jones hit a new high, each of which are supposed to be predictors of current and future economic vitality. But as in Europe, where mildly recessionary economic indicators in Spain stand in stark contrast to clear evidence of an economy in free fall, U.S. economic data seem to miss the central point. Simply stated, even if economists are correct that we are not officially in a recession, it is hard to argue against Achuthan's larger point that for a large share of the American workforce the U.S. economy is not working. If the U.S. economy is performing acceptably according to the standard metrics, perhaps the problem is in the metrics themselves.

If one looks at the performance of the U.S. economy over the past forty years, the record is not good for the average worker. Since 1973, wages and salaries have declined steadily as a share of GDP, from 54% to 45%. And the decline has been across sectors, as private wages declined from 43% to 37% and governmental wages declined from 11.4% to 8.5%.

This decline can be attributed to several factors. Technology has dramatically increased labor productivity (output per hour worked) even as  labor market pressures from free trade and capital mobility have suppressed real wages that might otherwise have increased with productivity growth. Globalization has created an economy in which growing productivity and wage competition have created great benefits to to investors in the form of increasing corporate profits and equity prices, while depressing real wages as a share of GDP and real family incomes in the United States.

And, as in Europe, economic pressures on real income levels in the United States have been and will continue to be exacerbated by the accelerating intergenerational transfer of resources from the young to the old. Even as wages and salaries are declining as a share of GDP, the retirement benefits of the Greatest Generation and Boomers are growing as a share of GDP, and will be funded by debts and taxes that will diminish the incomes and standard of living of their children and grandchildren for decades to come.

If globalization and free trade have contributed to declining returns to labor in the U.S., they have contributed to the elevation of upwards of a billion people out of poverty across the globe. But even regions such as India, China and east Asia that have benefitted from globalization--and the gutting of the American middle class--have seen the rise of their own plutocratic classes and the societally destabilizing impact of resulting inequalities.

The solutions are not readily apparent. To those on the left, higher corporate and income taxes are the essence of a redistributive strategy to correct increasing income inequality. Yet redistributive tax strategies do little or nothing to cure the underlying problem of work force adaptability. To those on the right, deregulation remains the key to avoiding the stagnation and constriction that handcuff the youth of Europe. It is notable that post-2008 protest movements on the left and the right each pointed to the problem of political corruption at the federal level resulting in special treatment for powerful industries.

Like many debates these days, the attacks on Lakshman Achuthan is missing the larger point. If according to the rules of the dismal science we not in a recession, it is our standard of measurement that is broken.  For most people, the definition of a recession is simple: a recession is a crappy economy. And by any measure, for the large proportion of the American workforce, that is what we have.

But the larger question since the 2008 financial collapse has been whether the underlying U.S. economic model is itself broken. If our economic model is working for a decreasing share of the population over time, democratic pressures will ultimately demand not just changes to the system of measurement, but to the system itself. 

The politics of sequester.

My school district client faces a $5 million reduction in federal funding for educational programs if the sequester goes through. That amount represents just under 1% of the total district budget, but of course a far larger share of their annual federal funding.

What will they do? Most programs will be continued with funding backfilled from reserves or other budget reductions, while some will be eliminated. They could provide no estimate of the "body count" impact.

In contrast, the Obama administration has fought the public relations war against sequestration--and in support of tax increases and "loophole closing"--not by planning for how to most effectively deliver services with fewer resources, but instead by painting a picture of the devastation to come. Recently departed Secretary of Defense Leon Panetta boldly asserted that any cuts at all to the Defense budget would necessarily reduce national security. This was an odd and disappointing stance from a man who has spent his life managing the federal budget--as Chairman of the House Budget Committee, Director of the Office of Management and Budget, White House Chief of Staff, and Defense Secretary--and who better than most understands that budgets are choices, and that the Department of Defense budget in particular has been famously larded with programs and systems the Generals themselves have opposed.

The Pentagon and its contractors have famously played politics to great budgetary effect over the years, making sure that each House district feels the benefits of Defense spending. So perhaps it was no surprise that the reaction to sequester was to play the same game. The first thing Panetta and his team propose to do is announce plans to furlough all of the 800,000 civilians working for the Department of Defense, who represent approximately 25% of total DOD workforce. This is not a strategy to manage the proposed 10% cuts seriously, but rather to maximize the political effect.

It would appear to an outside observer that this is the Administration battle plan: Unlike local governments across the country who are making plans to manage for a smaller funding level, demonstrate instead the chaos that will come if Congress does not bend to the Administration wishes.

This is an unfortunate strategy. The sequester may not be a smart way to manage the federal budget, but it may be proving to be the only way to manage the federal budget.

The Department of Defense is the case in point. Over the past decade, the DOD budget has grown by 60% as a share of GDP, from 3.0% to 4.7% of GDP. And this growth has been bipartisan, growing 43% under W. and a further 10% under Obama, and Congress has famously appropriated more than requested in the executive budget. Democrat activists in particular should support the sequester, as the mandated 10% cut in Defense appropriations marks the first reduction in Defense spending since the fall of the Berlin Wall.

It is not conceivable that within the massive DOD planning apparatus, there has not been significant work done to imagine a range of differing spending levels, force deployment configurations and alternative threat response strategies. Simply stated, it is irrational to suggest, as Secretary Panetta has, and as Administration response to sequester implies, that current funding levels are inherently optimal. The historical failure to have any serious management of the Pentagon budget by Congress--with any suggestion for reform or reductions met by charges of appeasement of surrender--makes a mockery of claims that nothing can be cut.

The current situation illustrates why Chuck Hegel was a poor choice for Defense Secretary, rather than former Undersecretary of Defense for Policy Michele Flournoy. The original notion may have been that nominating the Republican Hegel would ease difficult budget discussions with a Republican Congress, but clearly that notion was proven wrong by Hegel's ability to only win four Republican votes for his Senate confirmation. Flournoy, now at the Boston Consulting Group, is a specialist in budget strategies and can talk eloquently about the alternative strategic deployment futures and attendant spending reductions that should be on the table in world of limited resources.

President Obama's sequester strategy may be good politics in the short term, but it is likely bad politics in the long term. The greatest risk to the Democratic Party in 2014 and 2016 is that it fails to demonstrate its ability to manage the federal budget effectively as the economy recovers. Federal impact aid and other stimulus spending efforts were important to filling the void of the deep private sector recession post-2008. However, the stabilization of public sector employment and continued increases in public sector salaries during a period of private sector retrenchment has led to an imbalance that is now hard to reverse. Public sector budgets are now under great pressure as tax receipts in many jurisdictions remain below 2008 levels, while public employees--who were protected by the stimulus program from feeling the deep pain of the 2008-2010 recession felt in the private sector and whose salaries for the first time exceed those of comparable private sector workers--are loath to accept the need for budget cuts as economic growth is returning.

At election time, convincing the voters that your party is best able to manage the economy and the public enterprise remains a critical factor in the ultimate choices made by undecided voters, who tend to be fiscally conservative. For long, historical reasons--that may not be defensible given the disdain of both Ronald Reagan and W. for balanced budgets--this has been part of the Republican advantage in presidential elections. In 2012 this was not as salient a factor, both because the Republicans made an art of offending as many voting groups as possible, and because voters suspended their traditional criterial for assessing economic and fiscal performance in the wake of the deep post-2008 collapse.

By 2016, 2008 will have receded into memory, and once again fiscal administration will be fair game. Last year, the Pentagon spent more money on military bands than the nation spent on public broadcasting. Yet the President and Secretary Panetta continue to suggest that the military budget should essentially be considered untouchable, even as former Undersecretary Michele Flournoy has ably demonstrated that money alone is not the measure of our defense. With the sequester now reality, the Administration strategy should expand beyond escalating political rhetoric to get the funding reinstated, to demonstrating the Administration's ability to manage in an environment of reduced resources. When the next presidential year roles around, Democrats seeking the votes of those undecided voters in the center will need to be able to demonstrate their ability to manage in world of limited resources.

The day the music died.

Behind the ongoing political drama surrounding the sequester this week, we may have witnessed the withering denouement of Reagan Revolution. Riven by factional infighting since the November election, the Republican Party has come together to take a stand. It is not in defense of its no-tax pledge, which fell by the wayside last year. Nor is it to defend the Pentagon from deep cuts in spending, as the GOP has indicated that it intends to accept the sequester cuts that will take the largest bite from the Defense budget. And it is not in opposition to gay marriage, as this week dozens of GOP leaders signed on to an amicus brief in support of the constitutional right to marry for gay Americans.

The anti-tax, anti-gay and pro-defense positions have been among the cornerstones of the modern Republican Party, birthed in Barry Goldwater's campaign against Nelson Rockefeller, and brought to full flower under Ronald Reagan. And for a quarter century, the electoral coalition of single-issue voting groups--anti-tax, pro-life, anti-gay, pro-defense, among others--nurtured by Grover Norquist as the steel tip of the Republican spear thrived and vanquished Democrat dreams, pushing Republicans to the right and Democrats to the center.

The irony is that while Ronald Reagan remains the godhead of the modern Republican Party, it is not on his principles that the GOP today is standing its ground, but instead it is on the older conservative roots that Reagan pushed aside, the fiscal conservatism of Calvin Coolidge. For a quarter century, the Republican Party turned its back on its roots. Ronald Reagan's advocacy of tax cuts when marginal tax rates were 70% or higher was transformed into the embrace of tax cuts as a morally self-justifying good, without regard to fiscal consequences. The Party orthodoxy became captive to the unholy alliance of big spenders and tax cutters in its big tent, all the while giving lip service to the old school fiscal conservatives who sat marginalized in the corner. And it shunned, as well, the Party's historic standard of liberty writ large as it embraced a social conservatism that was quick to claim the mantle of freedom and liberty even as it denied the liberty interest of gays and women, among others, by redefining liberty along narrow, parochial lines.

The elections of 2010 and 2012 conspired to expose the deep internal contradictions of Reaganism. The Tea Partiers of 2010 drove a wedge between the tax cutters and big spenders by placing the notion of fiscal prudence back in center stage. They might have imagined that they were acting in the spirit of Ronald Reagan, but in their disdain for deficits their rhetoric was more aligned with Reagan's 1980 adversary, George H. W. Bush--the scion of a powerful traditional Republican family--who famously castigated Reagan's supply side jargon as voodoo economics.

If the 2010 election laid bare the long-simmering disconnect of Reaganomics and traditional conservative economics, the 2012 election confronted the GOP with the hypocrisy of letting social conservatives alone define the meaning of liberty in America. Faced with the new diversity of the American electorate this past November, the Grand Old Party that was created on the principle of liberty for all found itself standing instead for the economic and liberty interests of a shrinking share of the electorate.

The Reagan Revolution of the 1980s marked the end of a quarter century battle for control of the Republican Party. It began with Barry Goldwater's victory for populist, western conservatism over the New England and New York traditionalists. It continued with Richard Nixon's conversion of southern Democrats, who brought with them to the GOP the seething resentments of the post-reconstruction south. And its victory was complete when Ronald Reagan vanquished George H. W. Bush. Reagan's defeat of Bush--and traditional conservatism--was total. Bush prostrated himself before the victors. He ate his words belittling supply side economics, resigned his membership in Planned Parenthood, reversed his moderate stances on social issues, claimed pork rinds to be his snack food of choice, and retreated in humility after one presidential term, banished by Reagan's Maoist progeny for the cardinal sin of raising taxes to balance the federal budget.

Bush's banishment evolved into Shakespearean form with the elevation of his errant first born son from alcoholic playboy to the White House where he would systematically tear down all his father stood for. He would cut taxes and squander budget surpluses to prove his allegiance to his father's bete noire. He would take the country to wars against his father's tempered advice. All to grind into the dirt his father's legacy and his family's conservative principles.

Now, with few years left, George H. W. Bush may yet find redemption. If the destruction of traditional Republicanism took a quarter century to become complete with Reagan's triumph, a quarter century later we are seeing the waning and just decomposition of that movement. The Republican Party--the Party of Lincoln and the party of Coolidge--has a long legacy and a deep brand. And it may be that both the legacy and the brand can survive its half-century of revolutionary foment. If the core tenets of Republican conservatism are limited government and maximizing individual liberty, it may yet emerge from the ashes of its own death as a central force in our politics.

The notion of limited government remains the challenge in the face of budget and constituent realities. Tea Partiers motivated to reanimate the principle of fiscal prudence have never successfully articulated what its constituents are prepared to give up. The great failing of Paul Ryan's budget is that it proposed deep cuts in spending, but would not say from where, and when real programs have been put on the table, there has been no Party consensus on what should go. The stubborn fact remains that small rural red states are the disproportionate beneficiaries of federal spending, and at the end of the day that man who famously cried out at a Sarah Palin rally, "Don't let the government get its hands on my Medicare," willfully missed the point. Increasingly the federal government is Medicare--and national defense. And thus we have come to the Republican embrace of the sequester. Left with no agreement on what to cut, the sequester became the only path forward--and fiscal conservatism the last principle on which the GOP could make its stand.

Fiscal conservatism--the notion that resources are limited and choices must be made, choices between services and revenues, what we want and what we are willing to pay for--was always in conflict with Reaganism as it came to be. Grover Norquist's world was never a construct of moral truths, but rather of electoral strategy. And the core of that strategy--the notion that the no-tax pledge was a morally self-justifying principle--was in direct conflict with the quintessentially conservative notion that governance is about limits and tradeoffs and choices.

Despite the sense of demographic determinism that Democrats celebrated in the wake of the 2012 election, the majorities that turned out for Barack Obama among women, Latinos and Asian Americans are unlikely to be sustained. The graphic below presents a voter matrix reflecting four quadrants across liberal and conservative social and economic voter preferences. Historically--and 2012 was no different--while primary voters are dominated by the upper left and lower right quadrants, the core of the undecided electorate has been in the category of social liberal and economically conservative voters. That was once the sweet spot of New England Republicanism, back when fiscal conservatism was a core Republican value and the definition of liberty was not proscribed by religious conservatives.

Chaos within the Republican Party is not Barack Obama's doing, as John Boehner oddly suggested a few weeks ago. Rather, the last two election cycles have laid bare the untenable contradictions long buried within Republican ranks. With the withering of the old shibboleths, Republicans are struggling to find the common ground upon which they will stand, even as they recognize that it may be years before the Tea Party dominance in the House and right wing control over the presidential nominating process wanes.

There is no small irony that the Party's great hope may rest with Jeb Bush. Jeb, the former Florida Governor and W's younger brother, was always supposed to be the one who would run for president. He may be recalcitrant about the titanic Bush-Clinton clash that looms in 2016, but Jeb Bush is probably the only Republican candidate looming on the horizon who could successfully run the primary election gauntlet, and then as Richard Nixon proscribed, move back to the center--where the votes are--bring his party with him, the Reagan Revolution finally buried in the past.

American taliban.

National Rifle Association Executive Director Wayne LaPierre really out-did himself this week. Speaking in response to the Newtown, Connecticut shooting, LaPierre concluded that armed guards in the schools were the answer. Like those old time liberals he so disdains, LaPierre's solution to mass murder in schools was to throw money at the problem, demanding that Congress "appropriate whatever is necessary to put armed police officers in every single school in this nation."

In the days leading up LaPierre public statement, the NRA announced that it was "prepared to offer meaningful contributions to help make sure this never happens again." As it turns out, LaPierre offered nothing meaningful in his statement, and the only contributions were those that he demanded come from Congress--which is to say from the rest of us. On the issues of assault weapons or background checks, LaPierre would give no ground. And where might the money come from? No doubt from other federal education dollars. Perhaps we could divert National Science Foundation funding for science and mathematics education to pay for armed school guards.

Better that he had kept his mouth shut.

In one week, the two major planks of the Republican Party have demonstrated later stages of rot. Even more than its anti-abortion stance, the Republican Party is bound to its anti-tax pledge and pro-gun commitments. And those two political shibboleths are enforced by the organizational and political skills of the two men who are their public personae: Americans for Tax Reform founder Grover Norquist and LaPierre.

On Thursday, House Republicans walked out on Speaker John Boehner and formally rebuffed his public suggestion that they might be prepared to make a meaningful contribution to the fiscal cliff negotiations. But like the NRA, the House Republicans were unmoved by the urgency of the moment. The anti-tax pledge of the Republican party was formulated a quarter century ago under the premise that denying revenue to government would necessarily result in smaller government. Starve the beast was the mantra, and shrinking the size of government was the objective. But Norquist and his acolytes misjudged the American public and the Republican Party itself. As much as Americans in general, and Republicans in particular, might dislike paying taxes, neither has shown any interest in shrinking the size of government.

Even as Republicans rail away at the evils of debt, they have shown a consistent willingness to drive the nation's borrowing ever upward rather than see any reductions in spending on the military or Medicare, the programs most dear to their constituents. Even the much vaunted Ryan budget approved by the House eschewed any specifics on where future cuts might come from, and if our national politics have shown nothing, it is that to demand reductions in spending without specifics is vacuous hubris.

Then on Friday, Wayne LaPierre's words made a mockery of any serious discussion of school safety. In truth, there was nothing new in the tragedy in Newtown. While MSNBC host and erstwhile presidential candidate Joe Scarborough made an impassioned plea that the Newtown murders change everything, in fact that tragedy simply brought home to white, suburban America the reality of the random and tragic murders of children that have become commonplace across urban America, where 20 children a month die from random gun violence.

For LaPierre to suggest the militarization of schools ignores the metal detectors and guards already commonplace in urban schools. And perhaps that was his point. Perhaps unlike the rest of the nation that has, like Scarborough, seen Newtown as a siren call for change, LaPierre knows well that cities have been fighting a losing battle with guns for decades without the political muster to take him on.  LaPierre knows well that there have been six mass shootings since Jared Lee Loughner shot Gabby Giffords two years ago, sparking calls for change. LaPierre will stand his ground, firm in the belief he need give no quarter, that the anger always subsides.

In their embrace of absolute doctrine without regard to the facts on the ground, the anti-tax and pro-gun movements have contributed to the undermining of democratic society. Both stances refuse dialog and disdain compromise. Taxes in America have declined steadily for the decades since Norquist came on the scene, and that is in large measure is doing. But Norquist and his movement utterly failed to wean Americans off of their reliance on and demand for public spending. Over the past decade alone, even as individual income taxes have declined by 25% as a share of GDP, the areas of public spending most dear to the Republican base--military and entitlements--have grown faster than any other, up 56% and 37% as a share of GDP. Rather than shrink the size of government, Norquist has cultivated a world of followers content to give less to even as they demand more from their government. He has essentially turned John Kennedy's notion of public citizenship on its head, and contributed to Americans becoming a meaner and more self-centered electorate.

Which would seem to be an abt description of the contribution that Wayne LaPierre has made. Like Norquist, LaPierre is an absolutist, and absolutism is necessarily destructive of open dialog and compromise in a diverse democratic society. Few in America challenge the basic right of gun ownership in America, it is a reality and distinctive aspect of American culture dating to the nation's founding. Yet the demands of the NRA that even the most moderate limitations on gun sales and ownership be assessed only as part of the slippery slope to "government taking our guns" makes a mockery of the issue. After all, if the slope has been slippery, it is sliding in the wrong direction. Assault weapons.  Semi-automatics with high-capacity magazines. Machine guns. Grenade launchers. Rocket propelled grenades. Depleted uranium bullets. These are not the arms envisioned by the founders.

For LaPierre to demand that the federal government fund armed guards in every school rather than simply engage in reasonable discussion of the ease with which any American can arm him or herself like a Navy Seal dropping into Abbottabad defies belief.

On the radio after the LaPierre statement, an NRA member suggested that what we really need is a list of mentally ill people circulated as a "do not sell" list to gun dealers. Really?

Mitt Romney may have lost the Presidency due to a campaign that ignored the evolving diversity of the American electorate. But the Republican Party risks losing its salience as a political party as its members increasingly prove themselves unwilling and unable to demonstrate that they are free thinking adults able to have real discourse on the real challenges that face the country.

The Republican Party has won control of the House of Representatives in large part due to years of paying systematic attention to the decennial redistricting as a path to electoral advantage. But anchored in its absolutist policies, and hearing only the voices of those within their circle, Republican leaders are at risk of mistaking that gerrymandered majority to be evidence of popular support for their leadership on issues. Over the years, in thrall of Norquist and LaPierre and the Tea Party, the GOP has steadily lost its own center. What was once the party of grownups--the party of fiscal prudence and sound judgement--is increasingly slipping down a slope of its own and becoming a party of outliers and extremists. If nothing changes--and this was the point of Scarborough's plea--it will push away many who identify themselves as Republicans, but who increasingly find their party lacking the seriousness of purpose necessary to lead the nation. 

A unique moment.

We must protect the middle class! The cry has gone out from Washington in the wake of the failure of John Boehner to pass his Plan B budget plan. House Republicans--whose votes are needed for any fiscal cliff resolution--have gone home for the holiday, yet somehow that is supposed to leave the problem to the President and the Senate. I am not sure I understand that logic.

For some reason, people are expressing shock and surprise that House Republicans got their backs up and refused to go along. What else were they to do? Washington is a place where legislators vote their political interest. Republicans for a quarter century have declined to vote for taxes, to remain true to their pledge. Democrats have voted for wars in fear of being labeled unpatriotic, and voted to deregulate the financial system in pursuit of campaign cash. Who since Congresswoman Marjorie Margolies-Mezvinsky has fallen on her sword for the team or the nation? This is how the game is played, don't point the finger at Republicans.

But many in Washington should embrace the prospect of no resolution to the fiscal cliff prior to the end of the year. For their part, true conservative Republicans who believe in balanced budgets should be excited at the prospect of the expiration of the Bush tax cuts and the mandatory spending cuts, all due to arrive with the new year. A quick glimpse at the website of the non-partisan Congressional Budget Office illustrates the projected impact of allowing those schedule changes to take place, and the dire consequences of continuing down the business-as-usual path we are on.

On the other side of the aisle, liberal Democrats should be gleeful to finally achieve the sunset of tax cuts that they long despised, along with substantial cuts in military spending. Come the new year, they will have a more Democratic Congress and be in a stronger position to negotiate budget amendments to their liking.

There should, therefore, be a strong constituency for doing nothing.

Just imagine, if Washington would just do nothing, all the years and years of wrangling over the long slide of our nation toward fiscal calamity would be over. Overnight, we would achieve a degree of fiscal balance that most Americans must have come to believe is not possible.

And all it takes is for Congress and the President to do nothing.

Overnight, we would achieve a new and fiscally balanced baseline. If there is to be tax reform, it can be done in a balanced and patient manner. If spending levels are to be restored, those decisions can be made against a backdrop where for the first time in decades, spending reductions have been made in a fair manner.

Many have been quick to quote the Congressional Budget Office report that suggests that if the fiscal cliff is not avoided, GDP growth will be 0.5% lower and unemployment will increase at the end of 2013, and the nation risks a slide back into recession. But this selective citing of that report ignores the larger message that suggests that doing nothing will lead to far healthier growth in the ensuing years.

"If the fiscal tightening was removed and the policies that are currently in effect were kept in place indefinitely, a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates) and would eventually reduce the nation’s output and income below what would occur if the fiscal tightening was allowed to take place as currently set by law."

The essential message of the CBO report is what any rational person would presume to be the case: We have become addicted to paying our way on borrowed money, and weaning ourselves off of that practice will involve some pain. The longer we wait, the more painful withdrawal will be.

Why do politicians and pundits ignore the CBO's larger message that we will all be better off if nothing is done? The urgent calls to protect the middle class mask the desire of many in Washington to have a bill at year end that can do many things for many interest groups. It is Christmas and lobbyists are working overtime to get their piece of the Christmas tree legislation they see coming to a vote before year end. Just as tax credits for low income Americans were the lubricant that assured the passage of the Bush tax cuts a decade ago, this year tax relief for the middle class is the cover for a wide range of interests. Would people really be surprised to wake up in January to realize that the fiscal cliff legislation passed in the dead of some late December night actually made our situation worse?

Meanwhile, the facts about tax rates are simply ignored in the calls to protect the middle class from an encroaching government. Yet the facts suggest that every quintile of Americans has seen their total average federal tax rate and average individual income tax rate decline steadily over the past quater century. For the lowest quintile of Americans the average tax rate has declined 89%, for the second quintile the decline has been 52%, for the third quintile 38%, for the fourth quintile 26%, and for the top quintile 3%. Only the top 5% of Americans have seen their overall tax rate rise over time. And, as candidate Romney pointed out, in the case of federal income taxes alone, the bottom two quintiles of Americans have negative income tax rates (due to tax credits), while the middle quintile average income tax rate of 1.3% in 2009 represented a decline of 80% over the past quarter century.

For 30 years, tax cuts have been justified on the basis of an imperative that we "grow our way" to fiscal balance, and give Americans back their money. But the data simply don't support the argument that middle class Americans are over-taxed. Over the past decade, spending may have grown substantially, with military spending and entitlement spending leading the way, up 56% and 37% as a share of GDP. But American taxpayers are have not paid for that spending, as income tax revenues have declined by 25% as a share of GDP over that same timeframe. If there is a disconnect, it is the belief on the part of Americans--nurtured by a self-serving political class--that they are not getting what they pay for. The facts suggest quite the opposite, across the range of discretionary and entitlement programs, Americans are getting a lot, and paying less and less for it every year.

If the clock runs out midnight December 31st and there is no resolution to the fiscal cliff, the nation will have the opportunity to reset the terms of the fiscal debate in Washington. The Bush tax cuts will be behind us and the budget ground rules will have changed.

We are at a unique moment. If our leaders in Washington fail to act, they may solve a problem that has vexed our polity for years.

Solving the fiscal cliff.

Our Congressional leaders all look like they have been fed castor oil, as they stand together trying to assure the nation that they will not let us go over the fiscal cliff. Nancy Pelosi summed up the sense of disconnect when she suggest that by Christmas, they should have a plan with clear timelines.

By Christmas? So they will have a plan by Christmas and it will be in place by New Years? I guess it is time to let the Pelosi grandkids know that the ski trip is off.

This should not be so hard. The fiscal cliff is nothing more than one more set of self-imposed deadlines that Congress put in place so that they could comply with their own rules. We have seen this before.

Gramm-Rudman-Hollins. Paygo. All sorts of rules that Congress tried to put on itself. Oh, yes, and the Bush tax cuts, that are the cause of all of this sturm und drang. Those tax cuts did not have to expire. Congress could have made them permanent at the time. But Congressional spending rules would not allow permanent tax cuts without Congress admitting to the public that it was breaking the bank. So--unwilling to face up to its own profligacy--Congress squeezed those tax cuts between the cracks by pretending that they would pay for themselves in the out-years after they expired.

But even as they were passing tax cuts with an expiration date to comply with their own rules, Republicans at the time boldly pronounced that they would fight to extend the tax cuts when they were scheduled to expire, and pillory Democrats for wanting to raise taxes if they tried to let them expire. And so they have. Even for Washington, DC, it has been a tour de force of political cynicism.

One way out of the current impasse--and I say impasse based upon the look on Mitch McConnell's face as he tried to utter the words "I will play nice," even as he imagined the beating he could get back home in Kentucky in two years when Rand Paul runs someone against him from the right--would be for Congress and the President to let go of their narrow objectives--just for a moment--and imagine what a collective package of changes might look like if they thought about the combined impact of the changes.

So, in the hope of getting Nancy onto the slopes with her grandkids after Christmas, and alleviating Mitch's evident distress, I offer the following package of reforms as a recommended starting point. Keep in mind that each side has constituents and the package as a whole has something for everyone. This is not rocket science, it is--as Bill Clinton would say--arithmetic.

1. Begin with the premise that the 2001 and 2003 Bush tax cuts have expired, as will happen soon in any event if Harry Reid and Mitch McConnell cannot get their mutual loathing under control. So the top tax rate is back up to 39%, capital gains taxes and dividends are taxed as ordinary income and the carried interest exemption introduced in 2003 is history. Income derived from labor and capital is taxed equally, and at a high rate. Calm down Republicans. Remember this is the starting point.

2. Because of these changes, tax rates would be increased by at least 10% for most people, and by an extraordinary amount for people like Mitt Romney who have just enjoyed had a ten year tax holiday that was never envisioned under the Reagan-era tax structure.

3. Introduce a cap on deductions as Mitt Romney suggested. A nice idea that prevents the need to eliminate any of the high-value deductions that each have strong lobbies supporting them and achieves the outcome preferred by Democrats of raising new revenue from the highest income earners, while Republicans would appreciate the fact that this reform would fall heaviest on high-tax, blue state voters. Based upon Tax Policy Center estimates, a $25,000 cap would raise over $1 trillion of new revenue, with 50% of that revenue coming from the top 1% of income earners. Combining the cap with an inflation adjustment would allow for the elimination of the AMT, an historically troublesome tax provision that was designed to have a similar effect.

4. You now have a far more progressive tax structure, theoretically producing significantly more income. So from that point cut nominal tax rates back across the board to a level that makes these changes revenue neutral. So far, we have accomplished two goals. We have reduced rates and we have increased the share of income paid by the top 2%.

5. To mollify the finance industry--and as the largest political contributors to Democrats and Republicans alike they have to be mollified--because of the elimination of the carried interest loophole and preferential treatment of investment income, we will modify Dodd-Frank--an enormously burdensome law that is killing small banks and financial entrepreneurship--essentially to have it apply only to those large firms that exceed a certain level of market share, such as 2% of consumer deposits or 2% of derivatives volume. The objective is to reverse the course of financial reforms that have been far too sweeping and instead refocus on the need to impose rigorous capital and regulator requirements on those firms that constitute systemic risks, while leaving others alone. Republicans will like this because it would reduce the regulatory burden on 99.5% of banks. Democrats will like this because it would focus regulatory efforts on the largest and most visible institutions and could ultimately induce stockholders to push for the breakup of larger institutions, which should be an objective in any case.

6. As dividends become treated as ordinary income, corporate tax rules should be changed to eliminate the double taxation of dividends. Eliminating the double taxation of dividends is an important step, but one that always should have been addressed at the corporate level rather than at the investor level. Democrats will scream, but this is the right thing to do to treat dividends on an equal footing with interest. I know, you have no idea what I am talking about, but suffice it to say that our recurring problem with corporate over-leveraging--dating back to the Michael Milken era and up to the 2008 financial crisis--has been consistently supported by a federal tax code that incentivizes the use of debt over equity in corporate capitalization.

7. And as long as Democrats are screaming, raise the estate tax threshold back up to a high level. Pick a number. $10 million? $20 million? Whatever. The point is that wealth should be taxed when it is earned, and the estate tax is an ineffective tool for wealth redistribution. It might feel good, but at the end of the day it does little more than that. Our objective should be to fix our fiscal problems, and then have the capacity to focus on ways to assure upward mobility and access to education as our way of leveling the playing field. Just look at the Bureau of Labor Statistics data, the unemployment rate for those with a bachelors degree is 3.8%; for those with some college or an associates degree it is 6.9%; for those with a high school degree it is 8.4%; and for those who did not make it out of high school it is 12.2%. Education and enhanced social mobility is essential to addressing income inequality, and the estate tax is simply a punitive palliative.

8. While the increase in the estate tax threshold would ease a burden on the wealthy, the next step takes back what was giveth. It is time to establish means-tested co-payments for Medicare. It is simply the right thing to do. As the data shows, Americans by and large pay for their social security benefits, and thus means testing is not necessarily equitable. On the other hand, Medicare contributions over one's lifetime pay only a fraction of the program cost. As such--and despite the illusion of many that Medicare is something they earned--Medicare is a general welfare program and it is reasonable and appropriate to skew the benefits on the basis of need.

9. This gets us to the payroll tax. That needs to remain in place. Washington must not continue down the road with the illusion of "pension holidays." If you want to give money to people to spend, have at it, that is what Washington does best. But the payroll tax pays for our social security and it is in everyone's interest to maintain the integrity of that system.

10. Finally, institute a carbon tax as a source of new revenue, and reduce income tax rates by one dollar for every two dollars raised. It is good public policy that Republican and Democrat economists can agree on.

The rest is just about jiggering the numbers to balance the costs and the benefits, but the pieces are there. Oh, yes, one more thing. The debt ceiling. It is time for a new law that ties budget approval to debt authorization. When Congress approves spending, it approves funding. There should be no disconnect between those two actions. There is no greater hypocrisy than listening to members of Congress who vote for spending and who vote for war and then turn around and pontificate about deficits and the debt ceiling. Time to end that charade.

So there it is. Crunch the numbers, run the traps, it works. For the President and Democrats, it increases the burden on the top 2%, and even within that cohort it is progressive. For Republicans, it reduces income tax rates, probably by at least 20%, and tackles our highest-cost entitlement. And for the country, it taxes things we don't want, while reducing the taxes and regulatory burdens on things we do want. It reduces the incentives to over-leveraging in the corporate sector and to concentration in the financial sector. There is something there for progressives, environmentalists, corporate America, and for a broad swath of the financial sector.

Hedge fund managers will not be happy, but they are rich, so they will get over it. Mitt Romney just told them they lost because Barack Obama gave things to everyone else but them. Now Nancy and Mitch and Harry get to do the same thing.