Will democracy survive the debt and dependence it fosters?

This generation of Americans has been witness to one of the most stunning declines of a great power in the history of the world.

In 2000, the United States ran a surplus. In 2009, it ran a deficit of $1.4 trillion—10 percent of the economy. The 2010 deficit was almost equal, and the 2011 deficit is projected even higher. The national debt is surging to 100 percent of GDP, portending an eventual run on the dollar, a default, or Weimar inflation. The greatest creditor nation in history is now the world’s greatest debtor.

In the first decade of what was to be the Second American Century, a net of zero new jobs were created. Average households were earning less in real dollars at the end of the decade than at the beginning. The net worth of the American family, in stocks, bonds, savings, home values, receded 4 percent.

Fifty-thousand plants and factories shut down. As a source of jobs, manufacturing fell below healthcare and education in 2001, below retail sales in 2002, below local government in 2006, below leisure and hospitality, i.e., restaurants and bars, in 2008—all for the first time.

In April 2010, three of every four Americans, 74 percent, said the country is weaker than a decade ago, and 57 percent said life in America will be worse for the next generation than it is today.

Who did this to us? We did it to ourselves.

We abandoned economic nationalism for globalism. We cast aside fiscal prudence for partisan bidding for voting blocs. We ballooned our welfare state to rival the socialist states of Europe. And we launched a crusade for democracy that has us tied down in two decade-long south Asian wars.

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In 2009, Paul Volcker, former chairman of the Federal Reserve, told Congress the cause of the grave financial crisis was trade-related imbalances. Pressed by Sen. Chris Dodd, Volcker added, “Go back to the imbalances in the economy. The United States has been consuming more than it has been producing for many years.”

For decades, Japan’s trade surplus with the United States was the largest on earth. In the 21st century, China’s trade surplus with the United States began to dwarf Japan’s. In 2008, China exported five times the dollar volume of goods to America as she imported, and her trade surplus with America set a world record between any two nations—$266 billion. In August 2010, China’s trade surplus with the United States set a new all-time monthly record, $28 billion.

Nor was it all in toys and textiles. In critical items that the Commerce Department defines as advanced technology products (ATP), the U.S. trade deficit with China in 2010 hit a record $95 billion. China today has the trade profile of an industrial and technological power while the manifest of U.S. exports to China, aircraft excepted, reads like the exports of the Jamestown Colony to the mother country.

What was the impact of this tsunami of imports on employment? During the first decade of the 21st century, U.S. semiconductors and electronic-component producers lost 42 percent of their jobs; communications-equipment producers lost 48 percent of their jobs; textile and apparel producers lost, respectively, 63 percent and 61 percent of their jobs.

At every election, politicians decry America’s deepening dependence on foreign oil. But the U.S. trade deficit in manufactures, $440 billion in 2008, was $89 billion larger than the U.S. deficit in crude oil. Why is a dependence on the oil of Canada, Mexico, Venezuela, Nigeria, Saudi Arabia, and the Gulf a greater concern than a dependence on a rival power for computers and vital components of our high-tech industries and weapons systems?

As Auggie Tantillo, Executive Director of the American Manufacturing Trade Action Committee, argues:

Running a trade deficit for natural resources that the United States lacks is something that cannot be helped, but running a massive trade deficit in man-made products that America easily could produce itself is a choice—a poor choice that is bankrupting the country and responsible for the loss of millions of jobs.

The consequences of these trade “imbalances”: De-industrialization of America. A growing dependence on China for the necessities of our national life and the loans to pay for them. A loss of millions of the best jobs Americans ever had. A median wage and family income that have been stagnant for a decade. A steep decline in the global purchasing power of the dollar. A loss of national dynamism. A debt bomb that went off in our face in September 2008.

“It’s time to stop worrying about the deficit—and start panicking about the debt,” the Washington Post editorial began, “The fiscal situation was serious before the recession. It is now dire”:

In the space of a single fiscal year, 2009, the debt soared from 41 percent of the gross domestic product to 53 percent. This sum, which does not include what the government has borrowed from its own trust funds, is on track to rise to a crushing 85 percent of the economy by 2018.

Focusing on the “public debt”—that held by citizens, corporations, pension funds, and foreign governments—understates the true national debt, which is $14 trillion. But even that does not reflect the “structural deficit” the nation faces from legislated commitments to Social Security, Medicare, and government and military pensions.

According to David Walker, former head of the Government Accountability Office, these unfunded liabilities total $60 trillion, with Medicare accounting for $38 trillion. With the first wave of Baby Boomers reaching eligibility for full Social Security benefits in 2011, and the entire generation moving onto the rolls by 2029, an Everest of debt will begin to rise out of the sea and be visible to the world.

What are the risks of the exploding U.S. public debt?

Chinese, Japanese, and Gulf governments and sovereign wealth funds will suspect, as some already do, that they are holding U.S. paper on which America will one day default or cheapen by inflation. As their fears rise, our creditors will stop buying and start selling U.S. debt, or demand a higher rate of interest commensurate with their rising risk. The Fed will have to raise rates to attract borrowers, tumbling the economy into recession.

Once the vicious cycle begins, warns Walker, interest on the U.S. debt will become the largest item in the federal budget.

Is the new Congress aware of the peril? For the departed Congress was surely not. The lead story in the Post that same morning in December 2009 that the alarmed editorial on the national debt ran began thus: “The Senate cleared for President Obama’s signature on Sunday a $447 billion omnibus spending bill that contains thousands of earmarks and double-digit increases for several Cabinet agencies.” Total cost of the Senate bill—“$1.1 trillion, including average spending increases of 10 percent for dozens of federal agencies.”

Democrats claimed the gusher of money was needed to make up for the neglect of the Bush years. But the Bush years had been the fattest years for federal spending since the Great Society, and Bush had added his trillion-dollar wars and trillion-dollar tax cuts. By the end of his presidency, even conservatives were calling Bush our first Great Society Republican.

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“The lessons of history… show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.”

These words about Depression-era welfare are from Roosevelt’s 1935 State of the Union. FDR feared this self-reliant people might come to depend permanently upon government for the necessities of their daily lives. And, as with narcotics, such a dependency would destroy the national fiber and spirit.

Yet late in 2010 came news that 41.8 million Americans were on food stamps and the White House was predicting that the number would rise to 43 million in 2011.

It did. By December 2010, 42.9 million Americans were on food stamps and in Washington, D.C. more than a fifth of the population was getting food stamps. One in seven Americans cannot feed himself.

To chart America’s decline, this program is a good place to begin.

As a harbinger of the Great Society, in 1964, a Food Stamp Act was signed into law by LBJ appropriating $75 million for 350,000 individuals in 40 counties and three cities. The Food Stamp Act became law half a decade after J.K. Galbraith in his bestseller had declared America to be the world’s Affluent Society. No one was starving in the 1960s.

When Nixon took office in 1969, 3 million Americans were receiving food stamps at a cost of $270 million. Then CBS ran a program featuring a premature baby near death and told us it was an infant starving in America. The nation demanded action, and Nixon acted. When he left office in 1974, the food stamp program was feeding 16 million people at a cost of $4 billion.

Fast forward to 2009. The cost to taxpayers of the food stamp program hit $56 billion. The number of recipients and cost of the program continued to soar in 2010. First among the reasons is family disintegration. Forty-one percent of America’s children are born out of wedlock. Among black Americans it is 71 percent. Food stamps feed children abandoned by their fathers. Taxpayers are taking up slack for millions of deadbeat dads.

What a changed country we have become. A less affluent America survived a Depression and world war without anything like 99 weeks of unemployment insurance, welfare payments, earned income tax credits, food stamps, rent supplements, day care, school lunches, and Medicaid. The expectation was that almost everyone, with hard work and by keeping the nose to the grindstone, could make his or her own way.

No more. We have accepted today the existence in perpetuity of a permanent underclass of scores of millions who cannot cope and must be carried by society—fed, clothed, housed, tutored, medicated at taxpayer’s expense their entire lives. We have a dependent nation the size of Spain in our independent America. We have a new division in our country, those who pay a double or triple fare, and those who ride forever free.

There has been a precipitous decline in the character of our people. We are not only not the people our parents were. We are not even the people we used to be. FDR was right about what would happen if we did not get off the narcotic of welfare. Our country has undergone a “spiritual and moral disintegration, fundamentally destructive to the national fibre.”

In his Economic Consequences of the Peace, written after the Paris conference of 1919 that produced the Treaty of Versailles, John Maynard Keynes wrote, “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” Keynes agreed:

October 2011 IssueLenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Thinking back on what a nickel could buy in one’s boyhood, and what a dollar buys today, calls to mind the insight of Lenin and Keynes. In 1952, a Coke cost a nickel, as did a candy bar. Movies cost 25 cents, as did a gallon of gas or a pack of cigarettes, though you could pick up a carton for $2.

On the Internet the other day, a bargain was offered by the state of Kentucky: “Cut your smoking costs by as much as 60%. On an annual basis the savings are enormous. Premium Brand Name cigarettes like Camel and Marlboro as low as $43.99 per carton.”

Who is guilty of this debauching of the dollar? Well, who has had custody of the currency since 1913?

For the financial crisis that wiped out trillions in wealth and dumped us into the deepest recession since the 1930s, many have felt the lash of public anger. The Bush Republicans and Barney Frank Democrats who prodded lenders into making subprime mortgages to people who could not afford the houses they were buying. Fannie and Freddie. The Wall Street banks. The AIG geniuses.

Yet the Federal Reserve, though it controls the money, and every financial crisis is a monetary crisis, has escaped indictment.

“[T]he very people who devised the policies that produced the mess are now posing as the wise public servants who will show us the way out,” writes Tom Woods, whose Meltdown traced the Fed’s role in every financial crisis since the creature was spawned on Jekyll Island.

The “forgotten depression” of 1920-21 was brought on by the Fed’s printing of money for Wilson’s war. When, at war’s end, the Fed tightened, production fell 20 percent between mid-1920 and mid-1921. Why did we not read of that depression? Because Harding refused to intervene. He let businesses and banks fail and prices fall. The fever broke, and America, after slashing Wilson’s wartime tax rates, took off into the Roaring Twenties.

Then, as Milton Friedman related in a Monetary History of the United States, for which he won a Nobel Prize, the Fed began to expand the money supply in the mid-1920s. Cash poured into equity markets where stocks could be bought on 10 percent margin. The market soared. When the market stalled and stocks began to fall, the margin calls went out. Panic ensued. Banks in the thousands closed. A third of the money supply was wiped out. Thus did the Federal Reserve cause the Depression. Smoot and Hawley were framed.

Of the financial collapse that brought on the recession of 2008-2010 Woods writes, “The Fed was the greatest single contributor… . [M]ore dollars were created between 2000 and 2007 than in the rest of the republic’s history.” When the Fed tightened, that bubble, too, burst. Many argue that were it not for the independence and vision of Fed Chairman Ben Bernanke, the economy might have gone into the abyss after the Lehman Brothers collapse. But who brought us to the brink of the abyss?

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We were blind-sided. We never saw it coming.

So said Goldman Sachs’ Lloyd Blankfein of the financial crisis of 2008, likening the probability of such a collapse to four hurricanes hitting the East Coast in a single season. Blankfein was reminded by the chairman of the Financial Crisis Inquiry Committee that hurricanes are “acts of God.” But Blankfein was supported by Jamie Dimon of JPMorgan Chase, “Somehow, we just missed… that home prices don’t go up forever.”

Backing Blankfein’s plea of incomprehension is this undeniable truth: the crisis that killed Lehman Brothers would have killed them all, had not the Treasury and Federal Reserve given them cash transfusions of hundreds of billions in bailout money.

Yet there were Americans who warned of the housing bubble being created. Some predicted the empire of debt was coming down. Just as today there are those warning that the United States, with deficits running at 10 percent of GDP, is risking a run on the dollar or default on the national debt. Among them are Rudolph Penner, former head of the Congressional Budget Office, and David Walker.

With the public debt having risen in 2009 from 41 to 53 percent of GDP, Penner and Walker believe it imperative that we get the deficit under control. Yet it is difficult to see how, politically, this can be done.

There are three ways to do it. The first is through rapid economic growth that increases tax revenue and reduces outlays for the safety-net programs such as unemployment insurance. But growth comes slowly and can take us only so far. To close a deficit of 10 percent of GDP, major cuts in federal spending and tax hikes seem unavoidable.

Yet consider. The five largest items in the federal budget are Social Security, Medicare, Medicaid, defense, and interest on the debt. With trillion-dollar deficits projected through the Obama years, interest on the debt, which has to be paid, must go up.

And with seniors angry over Medicare cuts to finance health coverage for the uninsured, it would seem suicidal for the Democrats to cut Medicare again. The same holds for Medicaid. Is the Democratic Party, decimated in 2010, going to cut health benefits for the people who stood loyally by that party in defeat? Is the Democratic Party going to grab the third rail of American politics and agree to cut Social Security?

Any cuts in major entitlement programs by House Republicans would require the acquiescence of Harry Reid’s Senate and Obama’s White House. And how likely is that?

As for defense, Obama has himself deepened America’s involvement in Afghanistan to 100,000 troops and the Pentagon has to replace weaponry and machines destroyed or depreciated in a decade of war.

Where, then, are the big budget cuts to come from?

Will Congress or the White House cut homeland security, the FBI, or the CIA after the near disaster over Detroit, Christmas Day 2009, and the failed bombing of Times Square? Will Democrats and Republicans come together to cut veterans’ benefits, spending for our crumbling infrastructure of roads and bridges, or education when Obama is promising every child a chance at a college degree?

Will Reid’s Senate approve of cuts in food stamps, unemployment insurance, or the Earned Income Tax Credit when joblessness is still near double digits? Will a Senate that increased the budget of each department by an average of 10 percent for 2010 agree to take a knife to federal agencies or salaries when federal bureaucrats and beneficiaries of federal programs are the most reliable voting blocs in the Democratic coalition?

Not only has Obama promised not to raise taxes on the middle class, any broad-based tax increase would be hemlock for him and his party and never be approved by a Republican House.

Obama is caught in a dilemma from which there appears no escape. Democrats are the Party of Government. They feed it and it feeds them. The larger government becomes, the more agencies established, the more bureaucrats hired, the more citizens receiving benefits or checks, the more deeply entrenched is the Party of Government.

For 80 years, this has been the Democratic formula for success. “Tax and tax, spend and spend, elect and elect” was the pithy depiction of that policy attributed to FDR aide Harry Hopkins. And herein lies Obama’s dilemma. How does the leader of the Party of Government preside over an era of austerity, where federal employees and federal benefits are radically reduced, to avert a default on the debt?

Republicans, too, have drawn a line from which they cannot retreat.

They will not vote for a tax increase. Not only would that violate a commitment almost all have made to the people who elected them, it would seem suicidal. Republicans who sign on to tax hikes cannot go home again. For allied to the party today are Tea Party irregulars who shoot deserters and defectors in Washington’s tax battles and budget wars.

Republicans are not going to cross these people, for they have before them examples of what happens to those who do. Sen. Arlen Specter voted for the Obama stimulus and faced an instant primary challenge from former Rep. Pat Toomey who took a 20-point lead, forcing Specter to quit the party to survive. Specter is gone and Toomey is in the Senate. Tea Party people are not schooled in the Gerald Ford politics of compromise and consensus.

Conservatives are resisting tax hikes because they believe government has grown too immense for the good of the nation. Indeed, many prefer to run the risk of a debt default rather than transfer more wealth from the people and the private institutions that produce it to feed a government that cannot control its appetite.

Where does that leave President Obama—and us?

If taxes are off the table, defense and war costs are rising, and cuts in Social Security, Medicare, Medicaid, and the other entitlements are politically poisonous, how do we reduce a deficit of $1.3 or $1.5 trillion? America is facing not just a gridlock in government, but a deadlock of democracy, a crisis of the system and of the state itself.

On Nov. 2, 2010, in the third national election in four years, Americans voted again to get rid of a ruling regime. The nation is taking on the aspect of the French Fourth Republic, which shifted from one party and premier to another until the call went out from an exasperated nation to General de Gaulle to come and take charge of affairs. Both parties have lost the mandate of heaven. We are in uncharted waters. The country is up for grabs.

Ours is the world’s oldest constitutional republic, the model for them all. But if our elected leaders are incapable of imposing the sacrifices needed to pull the nation back from devaluation or default, is democracy really the future of mankind? Or is the model for the future the state capitalism of a China that weathered the storm better and has returned to 10-12 percent annual growth?

We have a system failure rooted in a societal failure. For behind the disaster lay greed, stupidity, and incompetence on a colossal scale. “Avarice, ambition,” warned John Adams, will “break the strongest cords of our Constitution as a whale goes through a net. Our Constitution is made only for a moral and religious people. It is wholly inadequate for any other.”

America’s fiscal crisis is a test of whether democracy is sustainable. Adams, like others of the Founding Fathers, did not think so. “Remember, that democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide.”

From Suicide of a Superpower: Will America Survive to 2025 by Patrick J. Buchanan. Copyright © 2011 by the author and reprinted by permission of Thomas Dunne Books, an imprint of St. Martin’s Press, LLC.

A free preview from the Suicide of a Superpower audiobook, read by the author, can be heard here, courtesy of Macmillan Audio:

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