Saturday, September 27, 2008

Deleveraging society

It remains unclear at this moment if there will be a resolution of the impasse surrounding the proposed $700 billion bank bailout bill. Since negotiations fell apart on Thursday, House Minority Leader John Boehner—with a brief cameo of John McCain—has been leading a phalanx of disgruntled House Republicans in opposition to the Main Street bailout of Wall Street.

Were that the situation was so simple.

The House Republican rerun of Pat Buchanan’s Peasants with Pitchforks routine would be charming, if it were not so off base. This financial crisis, while being billed as a Wall Street bailout, is all about Main Street. And if the House Republicans want to see the roots of this crisis, they need only look in a mirror. This crisis is all about debt. It is all about us.

Over the past quarter century—dating to the dawn of the Reagan Revolution in fact—America has become awash in debt, and sub-prime home mortgages are just the tip of the iceberg. Home mortgages. Credit cards. Auto loans. Business loans. Federal debt. As shown below, since 1980, our public debt has grown ten-fold, from $4.4 trillion to over $45 trillion

Somehow, in the early days of the Reagan years, one fundamental premise did not take root. While Reagan era luminaries such as David Stockman and Grover Norquist trumpeted about the notion that cutting revenue would lead inexorably to cutting expenditures, they underestimated the character and adaptability of the American political system. The abiding lesson of the Reagan years was not that Americans—people of thrift and hard work we were told—would embrace a government that did less for them so they could do more for themselves, but rather that there is nothing that we used to pay for with cash and hard work that we cannot instead pay for with debt—and leave for some future generation to deal with in the distant future.

Turns out, we are not as virtuous as we like to believe.

As illustrated below, our indebtedness—not just as a government but as a society—took off. As a percent of our national income, our cumulative debt burgeoned from a stable level of around 150% of GDP to 350% and counting.

As a nation, we have ceased to save, and—political rhetoric notwithstanding—we have never seriously considered that we should stop spending.

As we are getting in deeper and deeper debt, and as our national savings rate has declined to near-zero, we rely almost exclusively on foreigners to provide us with capital to fund our excessive public, private and corporate spending habits.

In addition, as the chart below illustrates, our growing debt is also increasingly owned by countries—China and Russia most notably—who are often our adversaries in international affairs. This fact was evident in the Fannie and Freddie bailout a few weeks ago, when Treasury Secretary Henry Paulson took pains to avoid any action that would diminish the value of the Fannie Mae bonds held by the Chinese, even as he wiped out the value of the preferred stock held by domestic banks.

Therefore, our growing indebtedness is quickly obliterating the dividing line between domestic fiscal policy and foreign policy. Like any debtor, we will increasingly have to temper our behavior in order to not get cross-wise with our creditors. If any of these holders of our bonds should decide to dump our paper or even move to diversify their central bank reserves out of US government securities, the dollar will fall further and our long-term interest rates will rise.

Our growing borrowing from abroad is a function of our continuing federal fiscal deficits, as well as our trade deficit—the difference between what we export and what we import. These two amounts together comprise our “current account” deficit, and generally reflect the amount of capital that we import every year to fund our public and private expenditures that we cannot pay for from governmental revenues, export earnings or out of our own annual savings.

The problem that we face is our growing addiction to debt as the driver of national income growth. The graph below presents the growth in national Gross Domestic Product over the past several decades, and illustrates the portion of that growth that can be accounted for through imported capital or financing as reflected in the current account deficit.

This data suggests that imported capital has funded an increasing share of our year-over-year GDP growth, and that since the beginning of this decade, the nation has experienced little growth in national income beyond that which has been purchased by borrowing against our future. While in all fairness, the current account deficit is not an exact proxy for imported capital—a portion of the trade deficit, for example, reflects accounting and other transactions—but the gist of the argument remains. The share of our annual GDP growth that is derived from infusions of foreign capital has been growing steadily over the course of this decade—the red line taking over the green—to the point where nearly all of our annual growth has been derived from foreign borrowing.

We are no longer a nation that is paying our own way and in control of our financial destiny, but rather have become addicted to increasing uses of debt to financing our way of life. These are not the characteristics of a great nation or a great people.

The obvious question for the next president will be how to change course. The crisis we face is not how to fix a banking crisis, but rather how to deleverage a society that has become increasingly dependent on debt and imported capital.

Historically, the traditional fix to excessive debt is inflation. As inflation grows, the borrowed dollars are paid back in a devalued currency.

And that strategy appears to be in play already. As this final graph illustrates, the decline in the dollar over the course of the decade against the Euro, and increasingly against the Chinese Renminbi will allow us to pay these countries back with a currency that will be worth far less to them then the currency they originally lent to us. If this seems a bit confusing, just consider that in 2001, oil was priced at $20 per barrel, compared to around $100 per barrel today. That illustrates the extent to which the dollars that we are using to pay back our borrowing are worth less in value—80% less in the case of oil value—than the dollars they lent to us a few years ago.

The risk, of course, is how long our international creditors will play this game with us, and when they will look to protect their own financial interests and be a bit less lenient in funding ours.

So as John Boehner and the House Republicans claim that they are looking out for Main Street, while decrying the abuses and profligacy of Wall Street, a long look in the mirror might serve them—and the rest of us—well. There are no innocents in this crisis, and the longer we refuse to look honestly at our complicity in the creation of this crisis, the steeper the cost will be of setting things right.

Wednesday, September 24, 2008

Plan B

Email query from the Caribbean:

Dem bald man say, You gotta give us $700 billion by Friday.
Dem beard man say, We’ll get back to you on the rest of this.
Dem bank man say, No vote now, sky gonna fall.
Dem law men say, F--- y'all. If Monday show and we still here. Wat den?

It is, of course, all a confidence game.

Markets are a confidence game—perhaps trust is a better word—built on the belief that tomorrow will come around and it will be a lot like today. That buyers and sellers will show up. That the rules will be enforced. And most trades are completed on a handshake.

And politics is a confidence game. Despite all the appearances of a knife fight, it is not unlike a trading floor. Deals are made on a handshake, and you are only as good as your word.

Today, the two games are joined. 535 members of Congress have to take the measure of Henry Paulson and Ben Bernanke. More than anything, the members detest and resent having their backs pushed up against the wall.

Deep down, they suspect this is just a Wall Street gangbang, as the banks push to include credit card receivables and other questionable assets in the grab bag, as the lobbyists swirl around looking for the greatest payday in the history of paydays, and as the CEOs with their homes in the Hamptons call to plead their case.

More than anything, the members cannot abide being told they have forty-eight hours, and they have no choice.

But what if they demur. What if through the peculiarities of the vote, the votes aren’t there.

Perhaps the members of the Republican Study Committee hunker down and decide to vote their convictions, and demand that investors and homeowners alike pay for their bad decisions.

Perhaps Bernie Sanders and the smattering of liberals not yet co-opted by the Democratic Leadership Council put their foot down on the principle that public aid must come at the price of public ownership.

And then the broad swath of the Center, cringing in embarrassment at being upstaged by the principled fringe, heed the populist call and abandon the Paulson Plan.

What then indeed?

Congress would look for a Plan B. And perhaps Plan B would focus on the underlying mortgages that are the root of the problem, rather than simply bailing out the financial intermediaries. After all, the fundamental problem with the mortgage-backed securities market is the lack of good information. With good information—however bad the news—liquidity would return to that market. Securities would find their appropriate market level.

Under a Plan B, Congress might create an interim insurance facility that would guarantee a portion of CDO cashflows—pending a workout of the underlying mortgages. Congress could direct the HFA and state mortgage finance agencies to work with troubled homeowners to restructure the terms of their mortgages, perhaps swapping a portion of the mortgage value for an equity share in future sale proceeds, to keep people in their homes and recoup some value over time. They could give bankruptcy judges the right to recast mortgages in default. And they could score political points by directing the FBI to focus on fraud and corruption in the finance industry.

For its part, the Fed window would be flung wide open for the banks and others who did not make bad choices to grab market share from those who did. And the market would do what it is supposed to do. Those who made bad choices suffer. Those who did not do well.

And there is a lot of money to be made on the hundreds of billions of CDOs that Paulson and Bernanke proposed to purchase for $700 billion, once information on the underlying assets is confirmed and value can be determined. Under Plan B, however, these profits would flow to hedge funds and private equity groups that would move in to acquire the illiquid assets that are now being marked to market at levels well below their real value. With aggressive federal action to validate and fix the underlying mortgages, a market for these securities would reemerge, and, with the prospect of profits to be made, every incentive will be in place to find and fix the underlying mortgages.

The problem, of course, is that Plan B is purely hypothetical. And it means that Monday morning would come without a fix in place. It means facing down the two wise men and their bailout plan and playing a game of chicken. And watching to see if the sky falls.

And there could be a lot of pain in the short-term. And in this case the short-term is the forty days before 435 members of Congress get their report cards from their constituents. Better to cast a vote for $700 billion and blame the bald guy if it fails, than bet on Plan B, even if, in the long-run, Plan B might be the right choice.

After all, as Lord Keynes famously said long ago, in the long-run, we are all dead.

Tuesday, September 23, 2008

The Gordian Knot

The swift demise of American capitalism did not arrive as imagined by John Dos Passos—farmers with pitchforks linked shoulder-to-shoulder with the urban proletariat, marching on Wall Street to tear down the House of Morgan—but rather at the urgings of America’s leading financiers, who have cast aside their dog-eared copies of Atlas Shrugged and are now looking to the Government, with pleading in their eyes and fear in their hearts, in the hope that someone can clean up the mess and make things right again.

It is truly a Gordian Knot that Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke are seeking to unravel, with threads that are interconnected and entangled.

Last Thursday evening, the two men met with leaders of Congress, and by all accounts left them speechless, as they described the cataclysm that might yet unfold. Though the meeting was not public, one can imagine how the presentation might have unfolded.

Paulson and Bernanke began by offering a timeline of events as the markets spiraled out of control—perhaps using AIG as Exhibit A. They described how the housing bubble, irresponsible lending and borrowing practices, and complex mortgage securitization structures led to the issuance of billions of dollars of securities that were vulnerable to a downturn. They explained how, as the housing market deteriorated, the mortgage-backed securities lost value and became illiquid. Under accounting mark-to-market rules established after the Enron collapse, the banks recognized these losses. As losses grew, the firms lost their capital reserves, their strong bond ratings, and their access to low-cost capital. Panic ensued. Banks and other financial institutions stopped lending as they moved to conserve cash. Short-term interest rates shot up in a matter of hours.

Almost overnight, the world lending markets dried up.

Paulson and Bernanke then pointed to two non-financial events that illustrated the public panic that would ensue if action were not taken to stanch the downward spiral.

The first event was the swift run on money market funds—nearly $90 billion withdrawn in one day—that came in the wake of the Fed’s decision not to bail out Lehman Brothers. Clearly, Paulson and Bernanke failed to anticipate the impact of a failure by Lehman on money market funds that invested in its commercial paper, and the run on money market funds that ensued after one fund, the Primary Fund, “broke the buck” and passed on its losses in Lehman paper to its money market fund investors.

The second event was contemporaneous run on AIG offices in Asia, where insurance policyholders frantically sought to cash in their policies prior to the looming collapse of the insurance giant. Facing public unrest, Asian central bank officials—who happen to be the largest holders of US Treasury securities—contacted Washington with some succinct advice: Fix it.

But as harsh as these real world examples are of the unraveling that might ensue if Paulson and Bernanke are not successful, there is a more troubling scenario that might have stunned Congressional leaders into silence. Perhaps, Paulson and Bernanke then turned to the problem that surfaced just as AIG teetered on the brink, before Paulson rushed in to buy the company last week.

AIG, like Lehman and Bear Stearns, is a major participant in the credit default swap market. The CDS market links buyers and sellers of corporate default risk, and offers the holders of corporate bonds the ability to sell the default risk associated with those bonds to a counter party. And as in most derivative contracts, credit terms are agreed to pursuant to which each party agrees to collateralize its obligations to the other party with Treasury securities, should its own credit be downgraded.

According to public accounts, just before the takeover, AIG had a collateral call on $60 billion of CDS contracts that required that the company immediately post $15 billion of Treasury securities as collateral, and anticipated a similar demand under a further $380 billion of its CDS contracts.

The $15 billion collateral call would have had an immediate impact on all of AIGs creditors and policyholders, as it would give the CDS counterparties a prior claim on those funds, putting their claims ahead of the range of other AIG creditors. A comparable collateral call on the other $380 billion of CDS contracts would have increased the aggregate collateral call to $100 billion, wiping out the company’s resources.

$100 billion of US Treasuries. That's 2% of the total volume of US Treasury securities. In the world.

What Paulson and Bernanke might have pointed out to the Congressional leadership, is that there are $62 trillion of CDS contracts currently outstanding—among American and international commercial banks, investment banks, hedge funds, pension funds and others. $62 trillion of uncharted obligations with attributes of debt to one party and a high-stakes gamble to the other.

$62 trillion. An amount greater that the $54 trillion gross domestic product of the entire world, as estimate by the World Bank.

On Sunday House Minority Leader John Boehner declined to describe the words that silenced Congressional leaders at the meeting, noting that there are certain things that you don’t discuss in public. Illiquidity in the banking system is something you can discuss. A run on money funds that was staunched you can discuss.

A universe of $62 trillion CDS contracts—defaults on which can send participants scrambling to seize collateral and protect their interests—derivative products whose terms and conditions are not subject to regulation or supervision—financial obligations once described by Warren Buffet as financial weapons of mass destruction—the impact of which no one really understands.

That is something you don’t talk about on the Sunday talk shows.

It is too much to grasp, really.

Friday, September 12, 2008

God's wars

It is five in the morning and I am wide-awake.

Nothing keeps me up at night. I have always been a sound sleeper, never one to get up and read in the middle of the night. That would be my wife. But it is five in the morning and I am wide-awake.

I have not written on the Sarah Palin nomination prior to now, frankly, because I did not feel I knew enough. I have worked with many Governors, and other politicians, and I am quite comfortable that people can surprise you. You just don’t know. I did not have a sense of how she thinks, and I did not have a sense of how she carries herself.

The strongest signal to me were comments from Gary Bauer, and his enthusiasm for her based on her stance on a vary narrow set of issues. I know as a general matter that if Gary Bauer feels one way on something, I am bound to end up on the other side.

But her comments in her interview with Charles Gibson on ABC—and equally her lack of humility—on foreign policy were astonishing. She dissembled on the question of whether the Iraq War is a task from God. I had watched the whole video of her speaking before a church audience and she was not—as she suggested—arguing, as Lincoln did, that she meant only that we should hope we are on God’s side. His remark was made when considering the devastation and horror of the Civil War, and was a statement of humility in the face of horror.

But that comment was not decisive, as none of us would like to be held to account for every public utterance.

Rather, it was her comfort with war—combined with a very simplistic view of events. Hers is a Manichean worldview, of those who are for us and those who are against us. That is what pierced through. Her answers were largely scripted, but underlying the script, her comfort with that world shone through to me.

She brings a determined fervor to her comments that suggest that war with Russia would be a fine notion, if it grew out of an obligation to Georgia. She offered no sense that Russia’s volatility was a foreign policy challenge to be managed with the goal of avoiding war.

Last week, Dick Cheney described our conflict with Russia as one that pitted them against the “Free World.” Harkening back to the days of us vs. the Communists, he spoke with the certainty of a great ideological warrior.

The problem is that we are no longer in a great ideological war. The Berlin Wall is gone, the Iron Curtain is no longer, and however imperfect their democracy, Russia's future must now be guided by the Russian people. Russia is a capitalist nation, part of the world economy, and an integral trading partner with Europe and Asia, just as we wanted them to be. Our relations with them are no longer black and white, and the challenges with them are as they are with all nations, about how we navigate power, self-interest and mutual interest.

Eight years ago, George W. Bush preached humility in the world, and it masked his sense of good and evil in the world that has informed his conduct of foreign policy. Sarah Palin came across to me as a true believer, equally comfortable with a righteous sense of good and evil, but lacking Bush’s political sense to keep it under wraps—or Lincoln’s deeply rooted understanding that even as one must fight battles, the certainty of good and evil is never so simple.

I suspect that is why she appeals to Gary Bauer, and why it is five in the morning and I am wide-awake.

Wednesday, September 10, 2008

Country first

Got some blowback from the last piece on our fiscal situation. Some have questioned my mental health for suggesting that whatever our financial mess, it is inconceivable that a Democrat could do anything but make it far worse. Whatever the cause, it is not the Republicans.

It is Congress, they pass the money bills! It is old people and the AARP! It is Democrats who love to spend!

This argument reflects the old adage that, “If you aren’t a Democrat in your 20s you have no heart. If aren’t a Republican in your 40s you have no brain.” However, while Newt Gingrich and others worked hard to change the first part, the Republican Party long ago abandoned its principles of fiscal conservatism that were the root of the second part.

In the 1970s, as the Republican Party was embracing supply-side economics and jettisoning its long-held, conservative fiscal principles, Milton Friedman cautioned his Republican colleagues not to be disingenuous. Despite the tax-cut rhetoric that was becoming the Party’s new mantra, the true size of government is measured by spending, and fiscal deficits are simply deferred tax increases. To cut taxes and keep spending is not conservative, he insisted, it is simply dishonest.

As much as McCain supporters would like to cling to the notion that the Republican Party has remained true to its long-abandoned principles, the historical evidence does not support their argument. People, of course, are unlikely to change their political views based on actual data—and no right-thinking Republican would acknowledge that Bill Clinton and Robert Rubin did a better job on the economy that either George Bush and Michael Boskin—but the argument that Republicans are either the party committed to smaller government or balanced budgets is simply specious.

As illustrated in the graph below, going back forty years to 1968—the starting date for data readily available from OMB and the Congressional Budget Office—through twenty-four years of Republican leadership and sixteen years of Democrat leadership, the overall size of the federal government, as measured by total outlays, has remained largely constant at 20% of the Gross Domestic Product—economic shorthand for the size of the US economy. Most notable during this period has been the growth of entitlement programs—primarily Social Security, Medicare and Medicaid—which have risen from 5.6% of GDP to 10.6% of GDP, and the concurrent 44% decline in discretionary spending, which largely comprises defense and domestic spending.

As this graph illustrates, the most dramatic decline in discretionary spending came under Nixon—the last Republican president elected as a traditional fiscal conservative before the Reagan Revolution—as defense spending declined significantly with the wind-down of the Vietnam War. Discretionary spending also declined under Clinton—who on fiscal matters famously pronounced “We are all Eisenhauer Republicans now"—though Republicans are always quick to take credit for Clinton's budget success, a claim that is not supported by the data presented below. And discretionary spending decreased modestly under Reagan, as defense spending rose while discretionary spending declined.

Under Jimmy Carter, overall discretionary spending was flat—defense spending rose a bit, while domestic spending fell—while discretionary spending rose as a percentage of GDP under Ford and George W. Bush.

The data shows that discretionary spending, and in particular domestic spending, fell under both Democratic presidents, while it rose under both Bush presidents. The data on the public debt is less ambiguous, as illustrated below. Here, the pattern is clear. The change in Republican Party doctrine to embrace of supply-side economics brought with it an acceptance of deficit spending and a build-up of the national debt as the price of growth—even if over the long-term the growth never brought the books back into balance.

As illustrated here, the national debt declined under Nixon—an old-time conservative Republican—as well as under Carter.

Fiscal deficits took off during the Reagan presidency, as the Reagan tax cuts were implemented without commensurate reductions in federal outlays. The public debt doubled as a percentage of GDP during the Reagan-Bush years. During the Clinton years, shrinking deficits and ultimately budget surpluses contributed to a decline in public debt. Finally, under George W. Bush, new tax cuts combined with war spending have contributed to renewed growth in the national debt.

Faced with the evidence that Republican presidents have left a trail of deficits and debt in their wake, supporters insist that deficits are the fault of Congress, and particularly of Congressional Democrats. But here again, the OMB data tells a different story. Executive budget recommendations and the impact of Congress on spending and deficits are tracked within OMB data beginning in 1982. The OMB data presents the executive budget recommendation, the actual deficit that was realized, and determines the extent to which the difference—generally a higher deficit—resulted from Congressional over-appropriation, economic conditions or technical factors.

The graph below illustrates the annual executive budget recommendation for each year, and the impact of subsequent Congressional action in red. While Congressional spending bills over-spent the executive recommendations in almost all years, the impact of this overspending was generally a fraction of the deficit starting point in the executive budget.

This data suggests that—as one would hope would be the case—that the primary driver of fiscal outcomes is the recommended administration budget, despite the desire to put our fiscal mess at the feet of Congress. During the period 1982-2007, administration budget recommendations contained average deficits of 10% of outlays, while the average impact of Congressional over-spending was 1.9% of outlays. Prior to the current administration, where the impact of Congress is overstated due to administration decision to keep war funding out of the executive budget and rely instead on supplemental appropriations, Congressional over-spending averaged just 0.8% per year.

Nor does the data support the notion that the fiscal culprit is the innate profligacy of Democrats. Congressional over-spending during years when Democrats controlled both houses of Congress averaged 0.4% of outlays, and averaged 0.6% when Democrats controlled both houses of Congress and the White House. During years when Republicans controlled both houses of Congress, overspending averaged 2.3% of outlays, and it averaged 4.6% when Republicans controlled both houses of Congress and the White House.

No doubt the McCain campaign will continue to push the time-honored attacks against the tax and spend Democrats. A visceral appeal against "Barack Reid Pelosi O'Biden." But they will offer no evidence to support their claims, because the Republicans long ago lost that high ground. The fact is that both parties spend; the difference is whether they pay for their spending, or borrow the money and push off the day of reckoning.

Then they will argue that their policies are pro-growth. And, of course, that is true. All things being equal, lower taxes are stimulative. But that is not supply-side magic, just the old school Keynesian economics that Friedman inveighed against. To argue that we must continue with the policies that have gotten us here, you have to answer the question of how and when will we stop digging ourselves into an ever-deeper hole, and why it will not be increasingly painful the longer we wait.

This is the dilemma that years of debt and deficits have left us with: there are few good choices left today.

But as our fiscal situation is weighing heavier—as each American family is now burdened with its $265,000 share of the new debts that the nation has taken on in the past seven years—it is past time that we move beyond the old rhetoric and acknowledge—as Milton Friedman suggested years ago—that continuing these fiscal policies is irresponsible.

We all know that cutting taxes is great politics, and we would all rather pay less than more, but isn't John McCain running on the principle that it is time to put the country first?

Sunday, September 07, 2008

At the precipice

Four years ago, with total aplomb, George W. Bush faced the nation and argued that if he were not reelected, all notions of “fiscal sanity” would be gone in Washington, DC. The notion of this president as the boy who held his finger in the fiscal dike would be comical if it were not so tragic.

One need only walk around New York City and see townhouses for sale with prices in dollars and euros to realize how far the mighty have fallen. One need only travel in foreign capitals to realize that while our infrastructure falls into disrepair, other nations are robustly investing in their future. Only a fool can argue as our debt burden grows and the dollar slides that we are not standing at a precipice.

Still, with an economic plan that offers more and deeper tax cuts, and no grasp of the consequences of continuing down the same path, John McCain is proving that the Republican Brand endures.

Republican: Balanced budgets. Small government. Individual liberty.

Not since George H.W. Bush almost thirty years ago attacked Ronald Reagan’s proposed tax cuts as Voodoo Economics has a national Republican leader stood up for the most basic tenets of Republican doctrine. Or what once was Republican doctrine.

In the 1980 contest between Bush and Reagan, the Republican Party formally turned away from any substantive commitment to fiscal responsibility because, as Grover Norquist—the founder of American’s for Tax Reform and one of the architects of the contemporary Republican coalition—likes to point out, the constituency that votes on the basis of balanced budgets is small—generally the old money and Wall Street set—and can be bought by a commitment to cutting taxes.

When Ronald Reagan took office, the public debt stood at $712 billion. Twelve years later, it had increased more than four-fold to $3.2 trillion. Under Bill Clinton’s watch, the increase was a mere $70 billion in eight years, or 2%. When George W. Bush took office, the public debt stood at $3.3 trillion. This year, it stands at $5.4 trillion, and increase of 64%.

Still today, Republicans claim the principles of fiscal responsibility as their own, and decry Democratic profligacy. But what data are they looking at? Coca Cola was once sold as a health elixir, but the evidence would prove otherwise. Where is the truth in advertising that adheres to the most basic areas of civic choice?

Today, any semblance of the historic identity of the Republican Party has been sundered. Based on Concord Coalition data, the total fiscal burden—including public debt and future unfunded entitlements—on each American totals $175,000, or $455,000 on each household. Eight years ago, these amounts were $72,500 per person, or $188,750 on each household. Therefore, the price of the past eight years—of tax cuts and massive increases in spending—has been over $100,000 per person, or $265,000 per family.

$265,000 per family. Enough to put four kids through the average public university, but instead just a burden on America's future.

Compare these numbers to per capita income of $33,250 and median family income of just over $50,000. Consider the real struggle that most families face to put kids through college, and the ease with which this new $265,000 obligation has been foisted on those same families.

This is not a theoretical debt burden, but rather the real cost of our current liabilities. It is the real world manifestation of Republican icon Milton Friedman’s wisdom—offered to contradict the economic hocus pocus of supply-siders—that a fiscal deficit is simply a commitment to raise taxes in the future. Deficit spending, as true Republicans easily grasped, is simply evidence of political opportunism and moral weakness.

The simple fact is that in 1982 the Republican Party walked away from fiscal responsibility, as it fell prey to—in the words of long-time Republican wise man Pete Peterson—the unholy alliance of tax-cutting and big spending Republicans, and their grip on the Party is as tight as ever.

Where is John McCain's political courage today? How is he putting the Country First today when he trades away his once-valued integrity for votes, even as his plans will foist an ever greater fiscal burden on the country's future?

This issue is manifest in the debate in the Presidential race over extending the 2001 and 2003 tax cuts. These tax cuts—which John McCain opposed when they were originally enacted for being skewed to the rich and inappropriate as the nation went to war—were approved in a manner of unmatched cynicism as they were set to expire within a ten-year timeframe to create a pretense of being “revenue-neutral,” even as the intention from inception was to characterize efforts to oppose extending them as a tax increase.

Today, John McCain proposes new cuts in corporate tax rates in addition to extending the 2001 and 2003 legislation as it expires. The Office of Management and Budget projects the cost of an extension of the 2001 and 2003 tax cuts, without regard to the additional corporate tax cuts, at $2 trillion. Meanwhile, McCain proposes to pay this cost through eliminating Congressional earmarks, which according to Citizens Against Government Waste peaked in 2005 at a cost of $27 billion. Therefore, even if all earmarks are eliminated, at their peak they would barely pay for one-third of the interest cost alone of extending the tax cuts.

In contrast, in 1993, Bill Clinton took the Democrat Party in the opposite direction, as he moved the party away from its roots, and embraced the very principles that the Republicans eschewed. As Bill Clinton declaimed early in his presidency, "We're all Eisenhower Republicans now. We stand for lower deficits and free trade and the bond market.” Today, Democrats propose to shift the tax burden toward the wealthiest Americans in favor of the middle class—much McCain advocated at the time of the 2001 and 2003 tax cuts—while adhering to the revenue neutral principle that was once claimed by Republicans.

Over the weeks to come, John McCain will pull the old horse out of the barn for one more run around the track. He will claim the Republican mantle of fiscal responsibility with the full-throated enthusiasm of either a naïf or a craven opportunist.

But will people notice that the horse is dead? Will the depth of the Republican brand still have enough juice to offer the voters succor one last time?

As Americans sit around the kitchen table, will they understand that the $265,000 that they have taken on in the last eight years is the price they will have to pay for failing to challenge those who prey on their optimism and their patriotism?

Will they understand that every tax cut and war and entitlement comes with a price and that none of the goodies that they are offered are ultimately paid for by anyone but themselves?

And will they understand that unless they stop accepting the easy answers, the price tag the next time around is only going to be higher?

Tuesday, September 02, 2008

A word please?

Enough with all of this.

Just ask a simple question: “Did John McCain know that Bristol was pregnant?”

There are two possible answers. Yes, he did. Or, no, he did not.

Is it really possible that the answer is yes?

Could John McCain, having realized that he could not pick his friend Joe Lieberman due to the ruthless blowback from the right wing and evangelical community, picked a woman he barely knew—that everyone barely knew—fully aware that her 17 year-old, unmarried daughter was pregnant?

That is nearly inconceivable. He would announce his selection, the attractive, strong and valiantly conservative Governor of Alaska to be his running mate right in the wake of Barack Obama’s speech. This would counter the Democrat bounce and energize the Party in the time leading up to the convention.

And what? This secret would not get out? The news would not undermine the energy he sought to build as he changed the conversation from Barack to the Republican ticket?

No. Sorry. That simply is not possible.

Therefore, the answer must be no, John McCain did not know at the time he named Sarah Palin to be his running mate.

But how could this information have slipped through the cracks? Clearly, it was not the fault of those responsible for vetting the candidate. Should they have known that she supported the Bridge to Nowhere before she opposed it? Sure. Should they have known that she supported a windfall profits tax on oil companies in Alaska? Absolutely. But no Washington lawyer would have written on the standard list of questions, “Which of your children are pregnant?” I don’t even think it would be legal.

So the answer really can only be that for reasons only known to Sarah Palin, she declined to mention it. For reasons that we may never not, either (a) it slipped her mind, or (b) she believed that it was a private matter and none of John McCain’s business, or (c) she thought it would hurt her chances, or perhaps, (d) she never really thought she was under serious consideration, so why bother?

Perhaps we will never know. I tend to go with (d). After all, even her mother-in-law thought she was kidding—and plans to vote for Obama in any event.

But just imagine how awkward it must have been. Some moments after he made his decision, and the word was going out. She thought, ‘Oh, my.’ And she turned to the presumptive Republican nominee, and in a soft voice said, “Senator, a word please…”

What is it with white people?

So, my wife and I are sitting here, and I look to her and just shake my head. What is it about these White kids that they just keep having babies? Wouldn't you know that that man makes the effort to put a White on the ticket, and a woman at that, and the next thing you know, her daughter is pregnant!

I mean really, what with all the advantages they give White people, the least you would think that they would teach their kids some values and not go around being like that. And now they say that she was the same thing, pregnant in high school and had to get married and all?

The shame of it is that this is going to set White people back another 20 years. Not going to find another presidential nominee picking a White person to be on the ticket, I don't care how badly they want to reach out and get the base motivated and whatnot. I don't care who says it's a White persons turn, or any of that. I just say enough of that. They can't show up on a a ticket for more than an hour, or day, or what, and one of them shows up being pregnant.

So I'm done, and my wife gets all up in my face. You know, Hell, she says, you don't know what our kids do, and where they do it, and with whom. So why are you getting so worked up about this poor White woman? She can't control what her daughter does. (Ain't that the truth, I manage to butt in.) So don't tell me that just because she is White, you are going to blame her for it, and tell me that because of that, you don't think she should run the country.

Why you men! You wouldn't say boo if she was a man! If she was a White man (Then she wouldn't be a she, now would she, I chime in, but she ignores me. Whatever.) you wouldn't have a word to say, except maybe for some comment about Where's was the mother at?

After all, it was a man that did this to her, but they are going to do the right thing, and get married.

Who is? I ask.

Bristol. Her daughter. The girl who's pregnant. And Levi.

Levi? Who's Levi?

He's the one who went and got her pregnant.


Figures. I knew the Jews were behind this.