Default is not in our future.

The notion of a default by the U.S. Government on outstanding Treasury securities is nonsense. This is not to say that Congress will act to raise the debt ceiling. Who knows what Congress, in its infinite wisdom, will do; but the notion that a failure to raise the debt ceiling will lead to a default by the U.S. Government on outstanding Treasury securities is nonsense.

Debt and deficits and default are thrown around loosely these days. Deficits are what we have when our budgeted revenues are less than our budgeted expenditures. Debt is what we issue from time to time to fund those deficits that result from our wanting more things from the government—services, wars, transfer payments—than we are willing to pay for in taxes.

And we also print currency.

Actually, printing currency is a concept that has largely been rendered quaint, but the concept of printing currency continues to hold a place in the public imagination for those times when the Federal Reserve funds some purchase or expenditure with money that it creates for that purpose, and is provided to the recipient through electronic transfer. There is no printing involved, and no currency either, at least in the Wikipedia definition of “physical objects generally accepted as a medium of exchange.”

In the case of the current battles over the federal budget and the raising of the debt ceiling, increasing the debt ceiling may be necessary for the issuance of new Treasury securities—which once legally issued carry the full faith and credit of the United States of America—as presumably such bonds cannot be legally issued if the debt ceiling has been reached. Therefore, failure to raise the debt ceiling would presumably constrain the ability of the Federal government to “spend beyond its means,” meaning spending in excess of current revenues within a budget year. In the absence of debt capacity under the debt ceiling, federal spending would have to be held in check, and constrained to the amount of available revenues within a budget year.

But a failure to lift the debt ceiling should have no impact on the ability—and obligation—of the Fed to pay the interest and maturing principal owed on Treasury securities. Such payments will be paid by the Fed through an electronic transfer of funds that for all intents and purposes are created at the moment of transfer, without regard to any budgetary action by the Congress or the availability of revenues in the Treasury. No budgetary action or further appropriation is required for the simple reason that any Treasury debt currently outstanding was legally issued under the debt ceiling at the time it was issued, and the full faith and credit pledge of the Government is pledged to its repayment.

And this is true of the general obligation indebtedness of any state government as well. Or Greece, for that matter.

The difference of course is the printing press. California can default on its general obligation bonds—if its politicians continue to play the games that are becoming all too easy and routine—because it must have money in the bank to pay its bonds when they come due. There does not need to be an appropriation in the budget—though there always is—but there does need to be money in the bank. Because unlike the U.S. Government, California does not have the ability to create currency to pay the debts that it has legally incurred and to which it has pledged its full faith and credit.

But the U.S. Government does have that ability. And it does have that obligation. And the Fed would act on that obligation regardless of what games Congress and the President might continue to play—whatever posturing they might find to be in their partisan interests as this charade plays out.

The fact is that U.S. Government will not default on its duly and legally authorized Treasury securities. And anyone who is paying attention understands this. Like the bondholders. Today, the yield on three-month Treasury bonds was one basis point. That is one one-hundredth of one percent. Or 0.01%. This rate has not changed in the past month. The three year rate is still below 1.00%, and the benchmark 10-year rate is 3.15%, or more than forty basis points less than one month ago.

So Democrats and Republicans can yell about debt and deficits, and manipulate as much as they like the simple fact that for decades now none of them have cared one whit about it, except for those moments that come along when it serves some partisan interest, and they can whip voters—who should be ashamed of themselves for going along with all of this—into a frenzy. But the markets have not blinked.

Because for all the debt, and for all the deficits, a default is not in our future. Because we own the printing press.

Whatever that means.

Who will tell the people.

For all the yelling and screaming about the national debt, you would think that Democrats and Republicans disagree about everything, when in fact they are in almost total agreement when it comes to fiscal matters. Or at least that is what the historical data seems to suggest.

The fundamental source of agreement is that Americans should get what they want, and they should not have to pay for it. Republicans think Americans want tax cuts and a strong national defense—and they should not have to pay for it. Democrats think Americans want healthcare and roads and schools, and should not have to pay for them. And most of all, Republicans and Democrats alike think that Americans should have unlimited access to drugs and medical care the closer to death they get—and certainly no one should be asked to pay for it.

At least that is what the historical record shows.

As illustrated below, federal personal income taxes paid—the purple line—have not kept pace with the growth of national income and GDP since 1980, much less with the growth in federal spending. That is to say that with all the growth in the Federal Government since Ronald Reagan came to town to shut it down, Americans have seen personal income taxes decline modestly as a share of national income. Stated simply, for every $100 of income earned by Americans in 1980, they paid $11 in personal income taxes, and over thirty years later that number was $10. And, as illustrated here as well, since 1980, total taxes—including personal and corporate income taxes, excise taxes, social security taxes and the rest—have rarely paid for all that we want, and we have made up for it by issuing debt.

Oddly enough, however, what we seem to want—what has been funded by Democrat and Republican Congresses and Presidents—has remained more constant than one might think. Since 1980, even as how much we pay has not changed materially, what we buy has not changed much either. After decades of partisan warfare, no area of federal spending has grown as a share of national income or GDP other than healthcare. In 1980, we spent 5% of GDP on defense vs. 4% today. In 1980, we spent 5% of GDP on non-defense discretionary spending vs. 4% today. In 1980, we spent 8% of GDP on non-Medicare/Medicaid entitlement spending—stuff like veterans benefits and student loans and farm subsidies—vs. 6% today. All of the growth—and therefore arguably all of the debt incurred since the bygone era of balanced budgets—has come for Medicare and Medicaid spending, which collectively grew by almost 200%, from 2% of GDP to 5%.

As the graph above illustrates by the divergence and convergence of the green and purple lines, instead of constraining spending—one of the original theories behind the tax cuts of the 1980s—declines in tax receipts have simply led to increasing levels of public debt, and conversely increases in tax receipts have led to moderating debt levels. That is to say, for all the arguments and blame about debt levels, the simple fact is that year over year we have been making a simple choice: Do we borrow or do we pony up our own dollars to pay for the budget that our elected officials approve.

The current debate over deficits and debt has been more about political theatre and gamesmanship than about constructive solutions. As one looks at the historical data, it is hard to avoid the conclusion that for past 30 years, all rhetoric aside, the national political establishment has come to accept that we do not have to pay for that which we want to receive. And this is a universal affliction, indifferent to political party. Everyone has been willing to cut what they don’t like on the margin; but no one has been willing to either tackle—or pay for—those things that everyone seems to want.

As suggested above and illustrated below, the primary source of spending growth has been healthcare. Perhaps this is not news to anyone, but it is surprising to note that since 1980, no other area of the federal budget has grown as fast as GDP and national income.

This trend has been uniform through Republican and Democrat administrations. As illustrated below, during the Reagan-Bush years, when military spending grew faster than GDP growth, its growth, in the end, was far surpassed by Medicare and Medicaid.

During the Clinton years as well, when both military and overall discretionary spending lagged behind GDP growth—and for the only time since early in the Nixon presidency that the federal actually had a balanced budget—healthcare cost growth continued unabated.

Finally, in the George W. years, when all manner of spending surged ahead, Medicare spending once again led all areas in spending growth.

For all the outcry about debt and deficits, the story is simpler that we want to imagine. First and foremost, we lost our way thirty years ago when in both the political and personal worlds we allowed ourselves to believe that it is ok to borrow instead of pay for those things that we want. And second, it is all about healthcare.

To his credit, Congressman Paul Ryan has put the issue of Medicare spending on the table, and suggested for the first time in memory that sustaining costs will require that people pay more. For his part, President Obama did the nation and his own legacy a great disservice when he chose to walk away from, rather than embrace, the admirable work of his commission on debt and deficits. That commission produced a politically balanced and thoughtful set of recommendations. While the commission lacked the super-majority vote of support that would have mandated an up or down vote by Congress—in part due to the aforementioned Congressman Ryan—it deserved that vote.

The nation has limited time to grasp this problem. To date, we have not felt the pain of the debt that we have accumulated over the past thirty years, as the interest costs we pay have been declining steadily. The irony is that the status of the dollar as the global reserve currency has been of particular benefit to us in the wake of the financial crisis. Just as our debt has been accelerating, our interest costs have reached historic lows as each global investors and central banks have continued to pour money into the dollar as the only freely convertible safe haven.

But when the global recovery comes, our costs are likely to accelerate. As the graph below illustrates, federal interest costs will accelerate rapidly with any return to normal interest rates. The average maturity of federal debt—data on which is not readily available—has been in the four to five year range over recent years, but may well have declined with the duration impact of QE2. Accordingly, this graph suggests that if our interest costs average in a return to historical interest rate yields—our net interest costs will quickly skyrocket, and within five or six years will exceed the current costs paid for either defense or Medicare spending.

This is not a radical scenario, but just based on a normal interest rate cycle. The disaster scenario happens if the bond market turns against the dollar and the reserve currency status of the dollar comes to an end.

The challenge that we face is to address our fiscal problems while we still enjoy our privileged access to capital. It is not a crisis yet—right now it is just political theatre. Somehow, for all the talk, most politicians just do not really believe that we are at risk. If they did, would they still be content to play the same games and use our fiscal challenges as one more prop for gaining partisan advantage?

As Americans, it is time to grow up and either pay for what we want, or to formally disavow wanting it. And we must all recognize that the debt that we have built up is our debt: It is the consequence of our political choices spanning a generation.

The President should reconsider his rejection of his own commission, and embrace it now, if it is not too late. Jerry Brown has already written the words for him:

If you are a Democrat who doesn’t want to make budget reductions in programs you fought for and deeply believe in, I understand that. If you are a Republican who has taken a stand against taxes, I understand where you are coming from.

But things are different this time...

We have seen the enemy, and it is us.

The last grownup.

Each time Ben Bernanke testifies before Congress, his job gets more difficult. Firmly ensconced between a rock and a hard place, Bernanke must defend the drastic measures he is taking as Chairman of the Federal Reserve Bank to support the economic recovery, all the while denying any extreme concerns that he might have, lest his words spook the bond markets and exacerbate the problems that are his to tackle.

But the extreme nature of current Fed actions—the quantitative easing strategy that essentially constitutes printing money to buy long-term bonds in an effort both to reduce long-term rates and flood the economy with liquidity—betray the depth of Bernanke’s concern. Looking back at a his seminal speech in 2002—when Bernanke laid out the extraordinary steps available to some future Fed chairman that would assure that Japan-style deflation could never happen here—one can read the full array of strategies Bernanke has now employed. However circumspect and positive he tries to be in his public commentary, his are the actions of one who believes the risks of falling back into recession, and ultimately into a deflationary spiral, are real indeed.

And he is not alone. The recently released minutes of the late January meeting of the Federal Reserve Bank Board of Governors indicate unanimous support for continuing the Fed’s QE2 strategy. Buried in the elliptical government-speak of the staff reports is the list of contingencies that the Fed Governors fear may yet drag the U.S. economy down into a deflationary spiral: Deepening financial market disarray in Europe; layoffs by stressed state and local governments; downside risks in housing prices; reversal of improving consumer sentiment; and slow job growth. And since that meeting, turmoil in the Middle East has spiked oil prices upward.

Congress, on the other hand, has largely moved on from the 2008 crisis. While Bernanke continues to warn of the risks of moving too quickly or too soon to reduce federal deficits, his words by and large are falling on deaf ears. Bernanke, a Republican Fed Chairman appointed by a Republican President, is now widely derided by new House leaders and their supporters who are in thrall of the Austrian school of economics that rejects both Keynesian theorists on the left and Monetarists on the right.

Harsher still have been the attacks from the international community. In the early months of the financial crisis, the Fed emerged as the world’s central bank, providing liquidity for U.S. and foreign banks alike to stem systemic failure. However, as the fear and panic receded into memory, protests escalated as the Fed expanded its efforts late last year. Bernanke, foreign leaders complained, was seeking to drive down the value of the dollar. He was seeking to build U.S. exports at the expense of other nations. He was seeking to export inflation and poverty.

Most shrill in its criticism was China, whose leaders and media decried Bernanke’s efforts and demanded that the Fed renounce its policies and strengthen the dollar. Yet, for all of those nations there was something far greater at stake, something that seemed to have been lost in all the noise: All of those nations—and none more so than China— depend on the strength and resilience of the United States economy for their own economic growth, and they have much to lose should the U.S. recovery fail. Instead of cries of indignation, some degree of introspection and patience should have been warranted from those foreign leaders as they consider what the future might hold should Bernanke fail.

But patience and introspection are commodities in short supply these days. Few in the United States seem to recall the turmoil in late 2008, when Hank Paulson begged Congress to act to save the financial system. Few seem to recall how the voices across the political spectrum and commentariat fell silent in the face of real and palpable fear of broad based economic collapse. The cavalier protests that Bernanke confronts these days are evidence of how quickly success in forestalling a greater crisis has engendered collective amnesia regarding that national near-death experience.

And the arrogant retorts from China strikes a similar cord. Despite the recent fanfare of China’s economy surpassing Japan in size, it remains a relatively poor country—on a per capita basis it is barely in the top 100 nations, sitting at 93 between Bosnia and El Savador according to IMF data. And the depth of China’s dependence on the U.S. consumer was laid bare following the 2008 collapse, as factories shut down and protesters quickly turned on the Communist regime, quieted only by an immediate and massive public works program.

Nowhere in the public declarations of Chinese leaders is the acknowledgement, the appreciation or the humility that might come with the recognition that without open access to the U.S. market, China has no path to becoming Japan, and the Communist Party will be hard pressed to keep its hold on power. Chinese leaders are quick to point to the excesses of U.S. consumerism—too much debt and too little savings—ignoring the paradox of their own dependence on that consumer excess.

Nowhere too is there any recognition of the unsustainability of the status quo. While the global financial collapse was precipitated by a housing asset bubble problems across the financial sector, it masked an accelerating problem at the center of the U.S. economy—the continuing erosion of the manufacturing sector that, for all the talk of the migration to a service economy, remains essential to sustaining the U.S. middle class wealth.

In the wake of the 2008 financial collapse, the U.S. manufacturing sector was in freefall, illustrated here in Federal Reserve data. The long run decline of the U.S. manufacturing economy was not news. The percent of the workforce employed in manufacturing declined steadily by decade—from 24% in 1970 to 21% in 1980 to 17% in 1990 to 14% in 2000—and this decline contributed directly to the lack of real wage growth for the middle quintile of the U.S. workforce over the past three decades.

However, despite these percentage declines, the actual number of workers employed in manufacturing was remarkably stable, declining only slightly from 19.2 million to 18.5 million from 1970 to 2000. In contrast, since 2000 manufacturing employment plummeted, as approximately 6 million jobs were lost by 2009, a decline of 33%.

The difference was China. Since 1970, U.S. manufacturers faced global competition from Germany and Japan to Singapore and Korea. Worker productivity steadily increased, as did manufacturing quality. Nonetheless, while the U.S. had negative trade balances with those countries that built their own economies through access to the U.S. market, by and large those trade balances remained manageable.

Trade with China has been another story, however. With a deep labor pool of very low cost labor and abundant capital provided through trade surpluses, the Chinese economy has grown steadily and driven manufacturing costs toward zero. Over the course of the past decade, trade with China eroded the U.S. manufacturing base. As illustrated here, as 6 million jobs were lost over the past decade, U.S. manufacturing income declined by 17% in real terms and imported Chinese goods grew in value from 6% to 20% of U.S. manufacturing income.

Perhaps most notable in this graph is the increase in the Chinese share of the total U.S. manufacturing trade deficit, which grew to 45%, or more than doubling, over the decade. For other countries that rely on free access to the U.S. market for their own economic development, this essentially meant that China, a relative new-comer to free trade, was rapidly squeezing out the rest of the world in the most important global market.

Central to China’s economic development strategy has been to peg the value of the renminbi to the dollar, and to carefully manage changes over time. Since the beginning of the Fed’s quantitative easing, the dollar has declined in value against the currency of the U.S.’s major trading partners, while the Chinese government has continued to resist pressure to open its currency to market forces.

Slowly, international opposition to Benanke’s policy has moderated, as other nations—Brazil most recently—have come to recognize that Bernanke’s fight is not with them, but with a Chinese regime whose predatory trade and currency policies will ultimately decimate their manufacturing sectors just as it has the U.S. And like Bernanke, they are beginning to realize that the future stability of their own economies depend on his success.

Last week, as oil prices moved over $100 and the Case-Shiller housing index turned downward, the hint of fear began to emerge that we are not out of the woods. But Benanke should not expect to see greater support for his efforts in Washington, as the 2012 election season is upon us. That’s just the way it is. Surely Ben Bernanke must know by now that if he succeeds there will be no acclaim or garlands, even as he understands that if he fails the consequences will be devastating.

Why now?

As we watch history unfold, the events that swirl around us are interrelated in ways we never could have imagined a generation ago. And so it is that events in Tunisia and Egypt can be seen as interconnected stories emerging from a single tableau.

For all of the stories wired in from Cairo of the yearning for freedom in Tahrir Square, the question of Why Now? is rarely addressed. Surely the predations of the state visited upon Arab populations by autocrats and secret police from Morocco to the Gulf are not news—at least not to the citizenry of those countries. Yet as blogs and bylines and televised reports reach us, their central narrative remains the yearning for freedom and dignity.

But Why Now?

In Tunisia, it was Mohammed Bouazizi, a food vendor in the city of Sidi Bouzid, who, after years of taunting and abuse by the police, immolated himself in rage and frustration, and ignited the storm that subsequently erupted. But it was the price of food that had changed Mohammed Bouazizi’s world, for the beatings were a regular feature of his life. And so too in Egypt, it is the price of basic foodstuffs—that consume as much as half of a typical family’s income—rather than the denial of basic rights that marks a material change in peoples lives.

Over the second half of 2010, basic food commodity prices have skyrocketed, with wheat and sugar prices up over 90% in six months. While many have pointed to supply and demand factors—ranging from growing demand in China to floods in Australia that threaten future wheat supplies—the fact is that commodity price inflation has not been limited to food.

If there is a simple answer to Why Now, it may be that the answer is less Hosni Mubarak than Ben Bernanke. In normal economic times, broad-based commodity price inflation would increase during periods of strong economic growth. But these are not normal economic times.

In the wake of the economic meltdown of 2008, it has become clear that the recovery of the world economy depends on successful return to growth in the United States. For all of the talk of decoupling Europe from the U.S., in the wake of the global collapse the U.S. Federal Reserve emerged as the de facto central bank of the E.U. And for all the talk of China rising, the collapse of U.S. consumer spending wrecked havoc on China in a matter of months, leading to widespread civil unrest and forcing the Communist regime to spend an amount equal to 20% of its foreign exchange reserves on a stimulus program to weather the storm.

By the middle of last year, Bernanke and the Fed broadened their efforts to push liquidity (read: money) into the system to forestall a recessionary "double-dip" and accelerate domestic job creation. This effort, known by the moniker Quantitative Easing, or QE2, basically entailed printing money and buying long-term Treasury bonds.

The response of the global markets to QE2 was an immediate understanding that the Fed's intention was to push down the value of the dollar to ease trade pressures and stimulate domestic growth, even as the Fed was counting on international investment to continue to fund U.S. deficit spending. In a massive game of chicken with the Chinese—and others whose national development strategies have been nothing less than dumping cheap goods into the hands of U.S. consumers—Bernanke was counting on international dependence on the U.S. dollar as the reserve currency to assure adequate continued flow of funds in the U.S., even as the dollar traded down in value.

To date, for all the complaining, from China to the Fox commentariat, Bernanke has thus far succeeded. International holdings of U.S. Treasuries have continued to grow in the face of a weakening dollar, the U.S. stock market has boomed and the economic recovery has been sustained. Even some vocal critics of quantitative easing have softened their views, such as Kansas City Fed President Thomas Hoenig, who recently suggested that the Fed would likely consider extending the program.

But if QE2 has been provoked little adverse reaction domestically, a more concrete impact of QE2 has been felt in Tunisia, Egypt and across the Middle East, where basic food price inflation has skyrocketed.

Despite all the talk about supply and demand factors pushing up food commodity prices, the recent price surge reflects the wave of speculative money flowing into commodities and gold, seeking protection against a declining U.S. dollar. As illustrated in this graph, since the implementation of QE2 in mid-2010, wheat and sugar prices—those foodstuffs most closely linked to Mohammed Bouazizi’s livelihood—have gone through the roof. While rising commodity prices have minimal impact on domestic U.S. inflation, it has a dramatic impact in less developed countries.

In Iran, fear of food riots made international news in December, as the Ahmadinejad regime sought to cut subsidies for fuel and food as commodity prices rose and further strained the national budget. And in Egypt, subsidy regimes that sought to provide low cost bread, oil, and sugar have provided little protection to the wide swath of the population—40% of whom live on less than $2.00 per day—as the price of food reportedly grew by 30% in the last six months of 2010, and the black market price of flour was 100 times the official subsidized price.

Food prices are not new as an instigating factor in popular uprisings, dating at least back to the American and French revolutions, and the price of bread can bring more people to the streets than the noblest of words. The ultimate indignity and humiliation heaped upon Mohammed Bouazizi was not the beatings that he grew to accept, but rather—faced with forces beyond his control— it was his inability to provide for his family, to fulfill that most basic responsibility.

For that humiliation, Hosni Mubarak may fall, like Tunisian President Ben Ali before him. But the story is not just about them. It also about the interconnection of the world in ways that we rarely think about, about how policies in Washington might affect traders in Zurich and, in turn, the life of Mohammed Bouazizi on a street in Sidi Bouzid. As we watch history unfold, and imagine what the next chapter might entail, the interdependence of our world should be neither ignored nor forgotten.

Once more into the breach.

The word is out. Wall Street is back. Houses in the Hamptons. High end cars. Manhattan condos. After two years of nervousness, excess may once again trump discretion, or shame.

Soon we will see Goldman CEO and former gold trader Lloyd Blankfein walking the halls of Congress once again, defending his industry's largesse and lucre—though perhaps this time he will have the good grace to forego his prior suggestion that they are doing “God’s work.”

Wall Street’s revival comes even as Citibank CEO Vikram Pandit took time out of the G-20 meetings in Korea to complain about how chilly the climate was for bankers in the U.S., in contrast to the warmth he felt ensconced among his global finance brethren.

Chilly indeed.

Could America conceivably be more accommodating to its major financial institutions, as they prepare to pay out record levels of bonus compensation in the coming weeks?

The myth continues that Wall Street was bailed out with the $700 billion of TARP money. Pushed through a recalcitrant Congress in the wanting months of the Bush administration by Hank Paulson and Ben Bernanke and disbursed over the months that ensued, TARP has become the iconic whipping boy of left, right and center alike.

Ironically, little of the TARP money was actually used to purchase bank “toxic assets,” as originally intended, as most banks refused to sell—fearing the losses that they would be forced to recognize. Instead, TARP funds were provided as equity infusions and asset guarantees that nursed the banks back from the brink of collapse.

Today, the details of the whole episode are receding into memory. Even as films and books have chronicled wide-ranging stupidity, fraud and incompetence, as a matter of public policy bad conduct was occasionally noted, but never pursued. We have moved on.

The boards of the banks remain intact. The CEOs that oversaw the debacle fly off to G-20 meetings in Geneva or Korea to bemoan their fate. To hear them talk, one would think that the banks were incidental to the financial crisis. And in their revision of history, the TARP money was forced upon them. They were doing just fine on their own.

Few recall Hank Paulson and Ben Bernanke viewing the American economy on the verge of collapse. Fewer still give credit to any of the participants—Bush, Paulson, Bernanke, Obama, Geithner—for having stabilized the financial system. That is now deep in the past.

The total cost of the orgy of greed that that surrounded the packaging and trading of complex derivatives and collateralized securities has yet to be fully tallied. Last year, the IMF projected total bank losses at over $4 trillion, with $2.7 trillion of those losses at U.S. banks. Federal Reserve Bank data shows household balance sheet losses from the market collapse reached $15 trillion in 2009—almost 24% of the total net worth of American families—before ebbing to $10 trillion as the equity markets rebounded.

What is lost in the fury over TARP is that it represents only a portion of the federal intervention to support the country’s leading banks, as well as the two largest investment banks, Goldman and Morgan Stanley, which converted into bank holding companies in order to gain access to Federal Reserve support.

The most far-reaching area of federal intervention has been the sustained injection of massive amounts of liquidity (i.e. money) into the banking system by leaving the critical Fed Funds Rate—the interest rate charged on interbank loans among members of the Fed system—at or close to zero.

The effects of a 0% Fed Funds Rate are profound. In a normal time, and in a normal, cyclical recession, lowering the Fed Funds Rate ripples through the economy as a lower cost of capital on prime business loans and other loans. In the current economy, however, little new business lending is taking place.

While Fed data indicates that little commercial banking (lending) is going on, banks are taking full advantage of the availability of zero interest loans, and have borrowed trillions from the Fed. Literally trillions. Goldman: $600 billion. Morgan Stanley: $2 trillion. Citi: $1.8 trillion. Bear Stearns (now J.P. Morgan): $1 trillion. Merrill Lynch (now Bank of America) $1.5 trillion.

The term trillion makes all of this somewhat hard to grasp. But what is easy to grasp is the notion that if someone lends you money at 0%—OK, 25 basis points if you want to be picky—reinvesting it at a positive spread is not hard to imagine. Most Americans would relish the thought of replenishing their depleted retirement savings with zero interest loans, and would find any number of ways to take advantage of the opportunity. Put the money in a bank. Buy treasuries. Buy bonds. Buy commodities. Buy gold. Buy almost anything.

For the banks, free money translates into huge trading profits with no trading risk if they stick to investing in treasuries, and more if the go farther afield. And that is the point. The Fed strategy of keeping the Fed Funds Rate at or near zero provides a back door way of recapitalizing the banks, of rebuilding the balance sheets of financial institutions that lost an estimated $3 trillion and were insolvent. $700 billion of TARP funds was nowhere near enough, and the banks bridled at the constraints on compensation that came as part of the deal. In contrast, the Fed strategy was clean, and for the most part invisible. It required no vote of Congress, no authorization or appropriation of federal funds. There was no public humiliation on Capitol Hill. The only downside—for the public at least—is that before those banking profits reach the bank balance sheets, 40% or so of the trading profits will be paid out as bonuses.

But the Fed strategy has come at a high price. While the zero Fed Funds Rate is great for the banks, it has been a killer for those living off of their savings and for the nation’s pension systems. Senior citizens whose income is derived from rolling over certificates of deposit have seen their interest income decline by as much as 95% as CD yields declined from the 3% to 5% range prior to the economic collapse to recent levels of ¼ to ½ of 1%, according to Fed data.

If much of this seems incomprehensible, the message is simple: The Federal Reserve policy of keeping its target rate near zero is intended to allow banks to recapitalize, but has the effect of taking money from the elderly and others living off their savings, and transferring that money to the banks.

Over the coming weeks, Wall Street banks will pay out an estimated $30 billion in bonuses. These bonuses come on the heels of the second year in a row of record trading profits. Those record profits are not a product of great market insight, but reflect what is possible when money is free.

So when you see Lloyd Blankfein walking the corridors of power on Capitol Hill, defending the trading profits of his industry and proclaiming once again that they are doing God’s work, give your mom a call, or your great aunt or your elderly neighbor living on a fixed income. Give them a hug, and thank them for their sacrifice for God and country. Apparently, their sacrifice is necessary to rebuild our banking system and our nation.

After all, someone has to pay the price, and God knows its not going to be the people who created the mess to begin with.

Passing moment.

Taken at their word, Tea Party acolytes had among their core message two principles: First, Congress should move quickly to end out of control deficit spending. Second, Congress should stop lying to the American people.

Well, so much for that election.

Over the past few weeks, in short order, Congress swept aside the recommendations of the President’s debt commission, ignored the parallel recommendations of the study committee led by Pete Domenici and Alice Rivlin, and moved to prevent the expiration of the Bush-era tax cuts that are set to expire at the end of this month.

Taken together, these actions reaffirm the principle that one ought to judge people on their actions rather than their words. For all of the words of praise directed at Erskine Bowles and Alan Simpson for putting a credible plan on the table—leading Bowles to foolishly intone that the era of deficit denial is over—Congress moved swiftly to assure jittery financial markets that such denial is still with us, and that any bold or courageous action by the 535 members of Congress to act on our long-term fiscal problems will not happen on their watch.

Or make that 534 members of Congress. Hats off to Kent Conrad, the sole member of the debt commission who will be in office in January who voted in favor of the debt commission recommendations.

To extend the Bush tax cuts is simply wrong.

Little if anything has been said in the public debate about why those tax cuts are set to expire: They expire to comply with the fiscal rules in place when the cuts were enacted into law. Back in 2001, tax legislation was required to meet a ten-year scoring rule, which required that the tax cuts be paid for over a ten-year horizon. The ten-year requirement itself was a liberalization of the earlier, less flexible, “Paygo” rules that required that changes be paid for on an ongoing basis.

These rules are not in the Constitution or some other founding document, but rather are rules Congress sets for itself, as if to guard the nation from Congress’ own penchant for reckless and inappropriate conduct. Congress does not have to approve balanced budgets—as we all know—but in the wake of Reagan-era deficits we saw the rise of legislation such as Gramm-Rudman-Hollings that sought to restrain Congress increasing disregard for fiscal prudence.

Simply stated, the Bush-era tax cut legislation provides for rates to return to the levels in effect in 2001 in order to pay for the largesse that was bestowed upon taxpayers over the ensuing years. Not just taxpayers who earn over $1 million, but all of us.

All those who are clamoring for tax rates to remain at the lower levels are giving the lie to the notion that Congress should be subject to any rules, or that such rules should be followed. The argument that tax rates should not be increased in the face of a recession is utterly disingenuous. Those arguing to gut the 2001 and 2003 tax bills now would be doing so regardless of our economic condition.

Look back at the historical record. Even as the tax cut legislation was being considered, Republican leaders assured their base that by 2010 the cuts would be made permanent, and that those who might seek to let the cuts expire would be attacked for raising taxes. That is to say, even at the moment of the original legislation, those who supported it eschewed any intention of adhering to the fiscal rules that Congress itself had imposed. At the time, the cynicism was breathtaking. But as political calculation, it was prescient.

Today, with the reversion to the pre-tax cut rates looming come January, few if any in Congress are prepared to stand on principle and remind their colleagues that those tax increase are the price that was to be paid for the prior years of reduced taxes. Instead, Congress can point to the economic situation as justification for their collective determination to undermine the fiscal rationale of the law that they are now seeking to upend.

The problem with the argument that this is not the time to “raise taxes” is that this was part of the deal. This was part of the rules—and a very limited set of rules at that—that were set in place to protect Congress from itself, and to protect the rest of the nation from Congress. And this will be no temporary action. By supporting a two-year extension, Republican strategists have made the sound bet that regardless of the financial condition two years from now, making those cuts permanent at that time will be an easy sell. After all, 2012 is an election year.

Perhaps further stimulus over the short-term is warranted, as the Domenici-Rivlin group specifically addressed. But ideally such actions would be targeted to have the greatest economic impact over the near term, while not undermining prospects for addressing the longer-term problems, such as providing a payroll tax holiday to boost domestic spending and addressing a corporate tax structure that inhibits the repatriation of foreign earnings and undermines domestic investment.

But the greatest irony is the support of eviscerating the Bush-era tax legislation coming from those who during the very same week supported the work—if not the specific recommendations—of the debt reduction commission. Both that commission and the Domenici-Rivlin group provided alternatives for balancing the short-term need for economic stimulus with long-term recommendations to address the nation’s fiscal situation. They provided our political leadership with the opportunity to stanch the momentum of a nation heading toward a fiscal train wreck. They provided a moment in which serious leaders could stand up and be counted.

How quickly that moment passed.

Representative Paul Ryan’s dissembling words in dismissing the work of the debt commission on which he served stand as evidence that for all the talk, most in Washington still do not believe that the problems we face warrant any serious consideration.

"I just don't think this thing (the work of the commission) has the ability to last in policy, and it simply buys us time. I'd rather fix the problem, with the Boomers starting to turn 65 this year, fix it once and for all so we can really get this thing fixed."

Ryan, the architect of his own fiscal reform plan, was simply unwilling to step forward and show the courage of his convictions. Imagine if he had said instead.

“I will support the Commission recommendations not because it is my preferred plan, but because it is the first step to forcing Congress—all of us who are charged to lead the American people—to make the hard choices necessary to chart a new course for our nation. I believe Congress must approve this plan. Then, those of us who believe there is a better way can propose changes to that plan that will improve our situation—bring down healthcare costs, further attack the problem of growing entitlement obligations at the federal and state level, increasing the pro-growth structure of our tax code.

“But all of those changes require first that we achieve balance—or something close to balance—and this plan does that. Those of us who believe further—and better—changes are necessary will make that case, to Congress and to the American people. But if this is the plan that gets is to a balanced starting point, we must all come together and support this as an essential first step.”

Almost 200 years ago, Alex deTocqueville commented that “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” Paul Ryan, and most others in Congress, will vote soon to bribe Americans one more time, in pursuit of their own narrow political interests.

Shortly thereafter, these same politicians will clamor for deficit reduction and decry the fiscal situation of our nation—a situation that is a product of their own cynicism, self-interest and unwillingness to do the job for which they were elected.

Market distortions.

It did not take long for the conflicts to emerge as Republicans struggle to make good on their commitments to reduce federal spending. In the wake of the Republican victory last Tuesday, public comments regarding how to cut the federal deficit followed a familiar line: Across the board cuts in spending, exempting Medicare, Social Security and Defense. Now, just a few short days after John Boehner’s victory lap, this strategy has been kicked to the curb.

The problem is that the math doesn’t work. Since 1980, those sacrosanct programs, Medicare, Social Security and Defense, have grown from 72% of the federal budget to 84%. Based on Congressional Budget Office data, non-defense discretionary spending for 2010 totaled $512 billion, which means that to meet Senator Jim DeMint’s threshold of $300 billion in cuts, one would have to reduce the non-defense discretionary budget by 60%. Despite the urge to point the finger at non-defense discretionary spending as the source of all that ails us, that spending category represented 3.7% of GDP in 2010, down from a quarter century peak of 3.8-3.9% in 2003-05, but up from the low of 3.2% reached in late 1990s.

Senator-elect Rand Paul has challenged the notion of sacrosanct programs, by suggesting instead that a 5% cut should be applied across the board. A 5% cut in the $3.2 trillion federal budget would translate into a $160 billion cut—still well short of DeMint’s threshold—but it puts into play those programs heretofore off limits, though still avoiding specifics of what to cut. Meanwhile, DeMint himself is mired in a battle with Mitch McConnell over the largely symbolic issue of earmarking.

Much has been written about the lack of specific proposals for spending reduction coming from Tea Party candidates during the run-up to the elections, but underlying the movement has been a call for reduced federal regulation and spending, and a return to greater reliance on free markets.

Such a call for the federal government to take its finger off the scale of competition and commerce could be a healthy change for the country, even if a painful one to achieve. Some of the pain would come in the form of economic dislocation, as industries now supported by federal subsidies or favorable tax or other treatment would have to swim in unfamiliar, competitive waters. But the greater pain would be felt by the members of Congress themselves—of every political stripe—who for decades have traded on their ability to tip the scale on behalf of those who support them.

We have all paid a price for the policies and priorities that are now deeply woven into the tapestry that constitutes the federal budget and system of regulation. Consider for a moment the role of federal spending and policies in exacerbating just a few of the problems that we continue to grapple with.

First, federal policy has directly encouraged overleveraging at the corporate and household level.

The 2008 economic collapse followed a period of massive over-leveraging at the corporate and household levels. At the corporate level, debt has been used for the past quarter century as a tool for increasing economic value, by companies, private equity funds and others. This over-leveraging of the corporate sector increases financial risk and vulnerability. Corporate over-leveraging is a specific response to the unequal treatment of debt and equity under the tax code. Simply stated, interest paid on debt is privileged by being deductible, while dividends are paid on an after tax basis. For any company seeking a $1 million investment, this unequal treatment provides a direct inducement to seek debt financing rather than equity investment.

At the household level, the inducements to borrowing are grounded in the tax-deductibility of mortgage payments vs. the payment of rent from after tax dollars, and the stimulation of consumer credit through home equity loans. Home ownership has long been touted as the cornerstone of national social policy, but of late the disadvantages of home ownership have become apparent. As we have built an increasingly dynamic national economy, labor mobility has become an increasing value, both for individuals seeking to optimize their career and educational opportunities, as well as for overall economic growth. Recently, Fed Chairman Bernanke noted the issue of labor immobility as an increasing problem for economic development. This was shorthand for people who cannot move for a job because they cannot sell their home.

Second, federal policy has directly encouraged overspending on medical procedures and pharmaceuticals.

The current structure of health insurance provides direct inducements to overspending on medical care. For example, drug insurance plans—whether private or public—that have the consumer paying a fraction of the price of a drug lead to high consumption based upon the low net price, while leaving the tax or premium paying public absorbing the rest of the cost. The impact of this incentive to overspending can be seen in the rash of commercials for new drugs for every imaginable syndrome from social anxiety disorder to overeating disorder to acne. For a $5 co-pay, there is a market for anything. At the full price of $200 per month, many consumers might choose lifestyle or nutritional solutions instead.

Third, federal policy has encouraged dependency on foreign oil.

Since the creation of CENTCOM by President Jimmy Carter, the United States has affirmed its policy priority of protecting western access to Middle East oil. After decades of failing to enact a federal energy policy, it is high time that we recognize that CENTCOM is our energy policy. If a heavy military presence in the Middle East and in other energy producing regions is part of the price of predictable access to our annual consumption of $400 billion or so of imported crude oil and petroleum products—as reported by the federal Energy Information Agency—then perhaps some share of our $600 billion defense budget should be internalized into the price consumers pay for oil products. Like overspending on drugs for which we only pay a portion of the true cost, our current energy policy has the effect of encouraging spending on oil by having consumers pay only a portion of the true price of delivering gasoline to the pump on a reliable basis.

Banks, pharma and oil are just three industries that have effectively used the federal government to enhance their competitive position and support or protect the markets for their products. And each of the practices that has been implemented to support and protect those industries—deductibility of debt, copayments for drugs and medical treatments, defense protection of oil supply lines—have encouraged patterns of over-consumption by masking the true price from the consumer and contributed directly to bubbles that we often discuss but rarely diagnose or address: Overleveraging, excessive societal spending on medical care and growing reliance on foreign oil.

In each case, addressing the incentive structure and effectively taking the federal finger off the scale could ameliorate these problems of over-consumption for which we have paid and continue to pay a heavy price: Reduce the bias toward debt in corporate finance and reduce financial risk. Increase individual incentives to make good health decisions through lifestyle changes and nutritional choices. Provide a more level playing field for non-oil based energy sources.

“The government is promoting bad behavior,” marked the opening salvo of Rick Santelli’s rant in the opening moments of the Tea Party movement. “How many of you people want to pay for your neighbor’s mortgage…?” Yet while Santelli focused on the bank bailouts, the larger problem stemmed from years of federal programs that promoted low cost mortgages—to support both home ownership and the building trades—that promoted a culture of over-borrowing and over-building.

There is no end to ways that we subsidize bad behavior, only to pick up the back end costs that ensue. To extend Santelli’s point, how many of us want to pay for agricultural subsidies and marketing programs to promote sales of cheese, corn syrup and sugar, and then pay for the skyrocketing health costs that stem from our poor nutrition habits? In Santelli's world of free markets and free choice, would not farmers live or die based on demand for their products—rather than their state's role in presidential primaries—and the customers bear the consequences of their own nutritional choices?

Today, we live in a world where prices have been distorted, often as a direct product of federal policies. And those distortions come with a price. We are now paying a high price for the collapse of an artificially induced housing boom. We pay through taxes, premiums and public debt for that portion of drug prices that are hidden from the consumer. And we pay the hidden cost of delivering oil to the pump through taxes, debt and war.

The question for Republicans as they seek to reduce the federal budget is not just whether they are prepared to cut discretionary military spending and tackle entitlement reform, but whether they are prepared to go farther and confront the complex system of subsidies, protections and regulations now built into the federal budget that distort free markets and lead to adverse outcomes that, as Rick Santelli noted, none of us want to pay for.

The free market aspirations of the Tea Party should not be silenced or dismissed, but instead should engender a much-needed reevaluation of federal fiscal, tax and regulatory policies. The question for Tea Party acolytes will be whether they are prepared to walk the walk and push to cleanse the federal budget of all manner of pork and privilege, or if theirs is a partisan battle that only aims to cut the federal budget on the backs of their political adversaries.

Shameless.

In a fit of self-importance—or perhaps it is despair—the media has pounced on Jon Stewart for stepping out of the studio and into the public square. Some veil their criticism as concern for Stewart’s career. Others savage him for crossing the line between news and entertainment.

Horror!

Like some rendition of Brigadoon, one has to wonder what world these critics are living in. Twenty years ago—give or take a decade—Ted Koppel interviewed Rush Limbaugh on Nightline. In response to Koppel questioning whether he—like Steward today—was crossing a sacred line, El Rushbo retorted, Ted, let’s remember, you and I, we’re in the entertainment business now.

Religion. Politics. News. Entertainment. If the line was blurred for Rush a few decades ago, it is now gone. When Glenn Beck stood on the Washington Mall in August and pronounced the next Great Awakening, he was bringing all four together, with himself firmly placed at the epicenter. Those who suggest that Jon Stewart crossed a line should open their eyes and behold the new world.

No one questions whether Glenn Beck is in the business of entertainment. Or politics. Or news. Nor should one question the same for Sarah Palin. Beck and Palin stand at the cutting edge of a democracy that is being subsumed into popular culture, and they understand well the seamless flow between news and entertainment, religion and politics. Beck has been in the ratings game for longer than Sarah. She spins one-liners with the best of them—her riff, How’s that hopey, changey thing workin’ out for ya? is viscous and humorous at the same time—but Beck has a trained ear for when one argument has run its course and it is time to develop new material.

The ones who don’t learn and adapt are the ardent followers. Whether in the guise of Reagan Democrats of the 1980s, the Perot voters of the 1990s or the Tea Party acolytes today, disaffected American voters are easily seduced by politicians who channel their anger and provide succor through promises of lower taxes and easy fixes. The rhetoric of false prophets and entertainers alike can lure them into the public square, ready to point fingers at all the sources of their pain.

But they never want to look into the mirror.

Check the record. With promises of cutting waste, fraud and abuse, and pointing the finger at welfare cheats, Ronald Reagan offered the promise of cutting taxes and reducing the size of the federal government. The Reagan administration succeeded in cutting taxes, but never introduced a budget to Congress that reduced spending. Despite all of the familiar arguments about the revenue growth that ensued, the greatest legacy of the Reagan years was the political lesson that tax cuts buy votes, while there is no meaningful constituency for cutting budgets beyond old school Republican bankers sipping a single malt at the New York Athletic Club.

In the three decades since the Gipper recast the rules of the game, the Republican Party has become the party of tax cuts and the Democrats the party of spending increases as the key argument to their constituencies. But neither party feels any obligation to take the painful steps necessary if they are to pay for the promises that they aim to deliver.

To suggest that Republicans have abandoned their brand is not an idle claim. Since 1980, Republicans have controlled the White House for 20 of 30 years. During that time, Republicans have routinely cut taxes, while never once proposing a budget that would pay for them. The Congressional Budget Office recently observed that the Medicare Part D program passed by George W. Bush will add more to the federal deficit over the next decade than the combined cost of the stimulus, healthcare and TARP legislation—to say nothing of the wars and tax cuts—yet the power of brand still leaves Republicans as the party of fiscal conservatism.

The past three decades offer ample evidence that there are no pure players in this debate. Not the Republican Party that lost its fiscal bona fides decades ago. Not the Democrat Party that in pursuit Wall Street largesse became the handmaiden of accelerating financial deregulation that culminated in financial chaos. And certainly not the American Family, those of all faiths and political persuasions who bought into the silly shibboleths of the new economy, and chose to lever up rather than hunker down as they faced stagnating real incomes.

Yet Tea Party acolytes remain enthralled by those who are selling them a bill of goods to build their own ratings, their electoral prospects or their speaker fees—with little regard for whether they are leading America further down a path of cynicism, and contributing to the further dysfunction of a political system that seems incapable of addressing the real and deepening problems that we face. The plaintive cry “Don’t let the Government get its hands on my Medicare,” might be apocryphal, but it highlights the vacuousness of a political movement that is built on deliberate denial by Americans of their own responsibility for the straits in which we find ourselves. As Pogo said, We have met the enemy, and he is us.

Today, as the economy lies in tatters in the wake of financial crimes and misdemeanors from Wall Street to Main Street, Americans remain reluctant to confront and admit their own complicity in the mess. It was tens of millions of average Americans who violated every rule they were supposed to have learned in kindergarten about living within their means and not borrowing too much. Today, these same Americans who bought too much house and borrowed against too many cards, now want to point the finger at the politicians and decry their profligacy.

The anger and fear that Americans feel as they gather to protest the unfairness of the world should be tempered by their own complicity in buying the same bill of goods, year after year. The truth is that we did not hold our politicians accountable because we did not want to have to choose between consumption and savings. We wanted more now and more in the future.

And compounding that anger and that fear must be a healthy dose of shame for what we have wrought. But rather than facing up to our own culpability, we have become even more determined to lash out at the other that must have created this mess.

After all, it can’t be our fault, because we are Americans. We are the noble citizens of the greatest nation in history. Our ethical conduct and fiscal prudence is beyond reproach. We know this to be the true because Glenn Beck and Sarah Palin and a raft of other politicians and pundits tell us so.

And we are too happy to believe them, because to do otherwise, and to accept some measure of responsibility for the world of our making would too hard. And for that, we should feel undying shame.

Working class hero.

The Delaware Senate race may not be close in the polls, but people in Delaware are nervous. Despite an apparent 15 point lead for the Democrat, Chris Coons, the palpable anger on the streets of the long-time patrician state of the Dupont family leads many to believe that the outcome of the race remains uncertain.

Delaware is a small state of less than one million people. With the industrial north and rural, agricultural south, it has its own political culture and history. While viewed by many as a Democrat, blue state, its statewide office-holders have flipped from D to R with regularity. And its politics have always had a certain genteel character—with each Election Day followed by Return Day, a public festival of reconciliation culminated by a parade honoring the winners and losers together.

But this year emotions are running high, as they are nationally. At the most recent debate, Republican Christine O’Donnell quizzed Chris Coons on the Constitutional basis of the separation of church and state. The Constitution has carried iconic status among right wing insurgencies over the years—though their affection has tended to focus on a few amendments of choice while ignoring those that less suit their purposes—and O’Donnell was quick to expand her query to whether there was any federal authority that should rightfully bind the choices of a free people. Perhaps unwittingly, her stance in defense of radical federalism recalled Delaware’s history as among the last states to abolish slavery, almost a full decade after the Emancipation Proclamation.

But despite being ridiculed in the national media for her apparent ignorance of the First Amendment, O’Donnell seemed quite pleased with her performance. Indeed, she appeared nothing short of gleeful during the exchange, as she egged Coons on, goading the Yalie into a brief discourse on the Establishment Clause.

In her view, O’Donnell won the moment—evidenced by her joy and the hoots from her supporters—as she had succeeded in stripping the veneer off of the generally unflappable Coons, exposing his essence as a high-brow elitist. You could almost read her thoughts: You see! Listen to him! Thinks he’s the smartest guy in the room, and that he can shame me with that little lecture on the Constitution. But he just doesn’t get it—this race is not about how smart he is; it is about deep and undying anger of Main Street Americans at all of those who for so long have pulled the levers of power, and seen fit to tell the rest of us how much smarter they are than we are.

O’Donnell got this far by bringing down the old school patrician Republican Mike Castle, who in her mind was not one whit better than Coons. Yet many still refuse to take her seriously and suggest that her goal is simply to garner the national stage for a bit and perhaps land a reality show on Fox. But the fact that her numbers remain north of 40% even after her First Amendment performance speaks to the depth of the anger and resentment Delawareans feel toward Washington, D.C., and support her belief that with strong turnout on Election Day she can ride that wave to public office.

O’Donnell’s rhetoric of resentment toward elites has been central to the Republican Party narrative for decades. In prior incarnations, the Party leveraged those resentments to build its base—from Nixon’s Southern Strategy, the Reagan Democrats and Pat Buchanan Peasants with Pitchforks to Lee Atwater and Karl Rove’s success in co-opting the evangelical Christian community.

But this time, the Republican Party apparatchiks have lost control of the narrative, and Tea Party leaders have wasted no words in asserting their willingness to tear the party apart if it does not follow their lead. They understand all too well that the anti-Washington movements of the past foundered quickly, and saw their leaders compromised and their energies dissipated as the rise of federal power and spending continued unabated.

The irony, of course, is that the Tea Party is a movement without any internally consistent principles. The anti-tax core of the message loses its coherence when combined with the parallel anger over deficit spending. And for all the rhetoric about deficits and healthcare reform, no serious Republican candidate who has embraced the Tea Party talking points believes that deficits were the cause of the housing bubble and ensuing collapse or that our continuing economic problems will be cured by eliminating deficits or repealing healthcare reform.

Instead, rage against the machine is the underlying theme. Christine O’Donnell is not running for office because she believes that she has a better idea about how to fix the economy, or anything else for that matter. Hers is a platform of platitudes and resentments against all those smartest-kids-in-the-class who have been running things all these years and treating the rest of the country like second-class citizens. And she hopes there are enough Delawareans who share her disdain and anger.

But while O’Donnell is unlikely to win on November 2nd, the Republican Party and House Speaker-in-Waiting John Boehner are in for a rough ride. After 40 years of service as the tip of the Republican spear on Election Day, this crowd of angry, resentful Main Street Americans may not be willing to fade away as they have in the past, as the election fades and Washington returns to business as usual. This time, the Republican Party may have to make good on its promises, and John Boehner et al will be hard pressed to construct a legislative agenda and budget that delivers on the disparate slogans they have endorsed and promises they have made.

But it sure will be interesting to watch.

They're mad as hell, but so easy to manipulate.

Today’s Tea Party has a point. The political progeny of George Wallace Democrats, Richard Nixon’s Silent Majority, the Reagan Democrats, supporters of Ross Perot, and Pat Buchanan’s Peasants with Pitchforks—largely white, working and middle class—are very pissed off. And for good reason. The American middle class that was once the envy of the world has taken an economic beating.

Since 1970, the middle class’ share of national income in the United States has steadily declined. Based on U.S. Census date, over the past 40 years, the middle class—as represented by the middle quintile of households—has improved its share of nation income in only four years, 1990, 1995, 2002 and 2007, and in aggregate saw a decline of 16% over the four decades. By way of comparison, the top quintile improved its share of national income by 17% over the same time period, and the top 5% of families by 31%.

The relative and absolute economic decline of the American middle class has accelerated. Back in the Mad Men years of the 1950s and 1960s, when the American middle class was the envy of the world, real household incomes grew by 35% and 35% in the respectively. Since then, real income growth has moderated, with growth rates of 6% in the 1970s and 1980s, before a brief uptick to 10% in the 1990s. Then the hammer fell, as over the past decade, real incomes for the middle quintile of American families declined by 6%.

So it is no surprise that, in Paddy Chayefsky’s words from the 1976 film Network, middle class Americans are mad as hell and aren’t going to take it any more.

What is surprising—and disappointing—is how easily manipulated the Tea Party movement has been, and how willing its followers seem to be to have their rage channeled against the chosen targets of self-interested and opportunistic leaders.

Socialism. Deficit spending. Healthcare reform. Barack Obama.

The current plight of the middle class had unfolding—and accelerating—for four decades, and this is the best Dick Armey and Sarah Palin and Glen Beck can come up with? And the millions of people embracing the Tea Party creed are willing to accept such blatantly shallow explanations for their plight?

The truth is that the plight of the middle class is a product of the triumph of capitalism, and is the direct product of deliberate national policies that have reflected the consensus of the American political and corporate establishment. Since the end of the Second World War, America has pursued national economic and foreign policies that have purchased world peace—such as it is—at a price of providing our former military and ideological adversaries with largely unfettered access to our markets. Free trade and the opening of world labor markets has supported dramatic growth in standards of living first in Japan and German in the wake of the Second World War, and then in China, the states of the former Soviet Union, India, and other smaller proxy states such as Vietnam as we “won” the Cold War.

Simply stated, we sought to create a world where the dominant world powers would compete in the economic marketplace rather than on the battlefield. Opening our markets brought billions of workers from the nations of our adversaries into direct economic competition with American workers. The impact of our integrated economic and foreign policies first emerged in the 1970s as Japan changed the landscape of the world auto industry and began an economic onslaught from which the American industrial heartland has never recovered.

The ensuing deterioration in the economic outcomes for middle class and working class Americans, and ultimately the decline in family incomes of the past decade, were masked by the steady declines in interest rates from their peak in the early 1980s and the growth in consumer and mortgage debt, which exploded over the past decade even as incomes declined in real terms. The now-familiar adage of the house-as-ATM-machine was very real, and sustained the illusion of growing disposable income until the music came to an abrupt halt in July 2008 when consumer debt peaked.

Real incomes across the American industrial heartland were doomed from the moment America chose to pursue its policy of open markets as a foreign policy tool. Competition with foreign workers depressed American real incomes as open markets pushed real wages toward a new equilibrium that would bring up living standards first in Germany, Japan and East Asia, and then across the globe. Flows of capital investment into new markets raised real incomes in these new markets, while the pressure on the American middle class continued unabated. While global economic growth ameliorated the depressing effect on wages in high-income countries, and technology and capital investment has maintained the level of productivity of American workers, it has done so at the expense of reducing employment levels, even as it increased aggregate output.

Socialism, deficits and healthcare are fine targets for bumper stickers and partisan finger pointing, but they have little to do with the plight many Americans face, but it has been capitalism, not socialism that has led to the dramatic changes in the world economy that have pressured American real incomes and brought middle class America to where it is today. And these changes have been the product of Democrat and Republican administrations alike. Similarly, while today’s deficits may loom as the next threat to our economic future, today they are neither crowding out investment in the private economy nor a plausible cause for the deterioration of middle class incomes over the past several decades.

Absent a more robust economic and political assessment of the state of our nation and the decline of the middle class, the Tea Party movement will lose its moment and leave us with nothing other than a few members of Congress who lack any meaningful platform that offers hope for a future that is different from the past. And the followers of Glen Beck, Sarah Palin and the rest will wonder what happened as they are reduced to just one more political constituency, complaining about their plight, claiming their entitlements, but doing little to build a brighter future for themselves or for the nation.