Washington Shutdown: The US Defeats Itself

After the American Century

The deadlocked government is a pathetic spectacle. The US is becoming a fumbling superpower, and Washington seems to have lost touch with the dangers that lurk in legislative gridlock. Meanwhile, the world is moving on, even if the US government is not. Perhaps in theory no other nation is as powerful as the US, but in practice no external enemies are needed. The United States is defeating itself.

When future historians analyze the post-Cold War era, they will describe how the United States, without a major external threat to bind the government together, splintered into factions and undermined the nation's finances, its environment, and its ability to compete.

Because of internal divisions, the world's only superpower is losing its moral and economic leadership. Congress, and more particularly the Republican Party, bears major responsibility for the crisis, as the nation sinks deeper into debt while lobbyists protect special interests and ideologues slash essential programs, such as food stamps, that assist ordinary Americans.

The opportunity to be a world leader in alternative energy technology has been squandered, and other nations instead are developing those industries and making themselves more efficient than the United States. American energy use per capita remains twice that of Europe, not least because of the widespread use of fracking in the US, which pollutes ground water in order to produce more oil and gas and promote continued over-consumption of energy.

Congress has also failed to meet the need for affordable health care necessary to remain competitive with other industrial nations. Obamacare is better than the old system, but it is still a poor compromise. It is the best program that Congress could produce, but compared to what already exists in other nations, it remains a private and for-profit system that is over-priced. In America, decent health care is in danger of becoming a consumer good for the well-to-do, not a right for all citizens. Obamacare seeks to deal with that, but it is not an optimal solution.

Compared to health care available in Scandinavia, Germany or France, Obamacare is expensive because it requires an army of insurance industry employees, lawyers, and accountants, none of whom do anything directly for patients. They are supposed to make the system more competitive and therefore less expensive. This is akin to setting up competing traffic lights, sewer systems, libraries or fire departments based on a fantasy that this will improve service.

Congress has also gutted a tax system that was functioning well in the 1990s. After 2001 Bush created large deficits by reducing the income tax on the wealthy. As a result, the debt burden grew for a decade, and an increasing share of the federal budget is now used just to pay interest. With this debt burden, the government's ability to take new initiatives has declined, but Congress refuses to re-instate a tax system that can pay the costs of government.

Congress does not save in all areas, however. Since 2001 it has spent an unspecified amount, far more than $150 billion, on surveillance and spying. The spy agencies allegedly can read all messages and infiltrate everywhere, but they either cannot or do not wish to stop the epidemic of Internet fraud or the avalanche of spam, both of which are costly drains on the US economy. National security is now defined as almost entirely a matter of stopping terrorism, and apparently the Congress thinks that it is impossible to spend too much on that goal.

Symptomatic of the general American failure of these years are confrontations over the budget.  leading to today, October 1, with its government shutdown. The government is without funds. This idiotic brinkmanship puts the American currency and the US economy at risk.

Should foreign nations, corporations and investors lose faith in the political stability of the United States, the rush of money out of the country could possibly be irreversible. Oil might be traded in Euros rather than dollars, for example. Investors looking for a stable currency could go elsewhere. Suddenly, the US might need to pay its own debt rather than rely on others to buy its government bonds.  If that happens, the collapse will eclipse the crash of 2008, and the era when the United States was a superpower could come abruptly to an end. It could become a gigantic, economic invalid, with high interest rates, a huge national debt, and an outmoded energy system.

This extreme scenario is unlikely, but the Republicans are doing what they can to undermine permanently the integrity of the economy. They are becoming a greater menace to the United States than any foreign threat. Having won the Cold War, the United States is defeating itself.

Different Default Situations: US vs. EU

After the American Century

Both the EU and the US are struggling with massive public indebtedness, and in each case the problems emerge from bad decisions made during the last decade. The problems are quite different, however.

First, consider The United States. It seems hard to believe now but the US had balanced its budget and was rapidly paying off its national debt in 2000. The current fiscal woes are due to an excessive tax cut that overstimulated the economy, combined with massive military expenditures and a failure to regulate the banks. These problems all came from the White House, which dismally failed to protect the strong economy created in the 1990s. Bush overspent, undertaxed, and virtually abandoned regulation. The country needs years to get out of the mess he created, during which it needs to raise taxes back to where they were in 2000, particularly on wealthy people. But the Republicans, once a party of fiscal rsponsibility, have no intelligible economic program and they seem willing to let the nation go into default rather than compromise with the White House. In short, the American problem is firmly lodged in Washington, rooted in the failures of the Bush years. The problem is not impossible to solve from an economic point of view, but it is hard to resolve politically. The stupidity is, if you will, ideological.

Second, consider Europe. Here the problem is much different. The problem has emerged at the regional level - Greece, Italy, Spain, Portugal, and Ireland, all have weak economies and huge deficits. In contrast, some other members of the EU, notably Germany and Sweden, have strongly rebounding economies and do not have unbalanced national budgets. The problem here is that no single banking policy is appropriate for both the strong nations and those tottering on the brink of default. The stupidity in the EU is, if you will, a regional matter.

The US has a problem that could be easily solved by reverting to the tax code of the Clinton years. Possibly, something approaching this will occur, probably at the last minute. As Winston Churchill once said, the Americans always do the right thing in the end, but not before they exhaust all the other possibilities.

In contrast, it is much harder to see what the EU can do to solve its fiscal problems. The failure of Greece to pay its debts could set off a financial tsunami. Even the controlled default now being contemplated (or rather orchestrated in Brussels)  could have dire effects. The unity of the EU will be sorely tested if the fiscally responsible economies have to bail out those, like Italy, that are rife with tax cheating and black market labor. Why should Germans or French tax payers have to endure higher taxes when many wealthy in Greece continue to lie about their assets and pay less than they should?

History is not logical, of course, and it might be that the US will stumble into a completely unnecessary default, while the Europeans stumble through to a somewhat undeserved equilibrium. But the fascinating thing is to see how these wealthy countries have made such a mess of fiscal policy.  In a worse case scenario, default on either side of the Atlantic could trigger a larger world crisis, from which Asia would almost certainly emerge the stronger.

We are in for a perilous three months.

Weird Home Computer Tax in Danish "Reform"

After the American Century

With the world's highest taxes, Denmark periodically goes through the ritual of pretending to lower and simplify taxes. What always seems to result is a more complex tax code than before. I will not try to explain the new law, because after reading through it, I am not certain I understand it. That is why Denmark is a paradise for tax accountants, because you literally cannot figure out what the rules are yourself.

Rather than write about the whole complex package, I want to single out one remarkable new tax that has been added. (In any tax reduction plan in Denmark new taxes are always added). This one is for 5000 DK a year, almost $1000 for anyone who gets a computer or telephone from their employer. I hope I am misreading it, but it might mean that even if you have paid for your home computer, as I have (because the humanities faculties generally are broke), just using the Internet hookup would unleash the tax office on me. That's right, if I have a home office and check emails from home at night or on the weekend - that is, if I want to work a bit overtime, the punishment will be almost $1000 a year.

Now if the real purpose of the tax law was to get people to work less, this might make sense. But the stated purpose of the law is to encourage people to work more, to increase the work people are willing to do by lowering the tax rate. Denmark's baby boomers are marching into retirement soon, and the country cannot afford it unless people work for more years and more hours during those years.

This tax seems particularly stupid because it is aimed at anyone whose work involves communicating with Asia or North America (two rather large markets). Think about time zone differences. Send an email at noon from Denmark to Los Angeles (where it is midnight), and the reply will probably come after 21:00. Under the new law, if an employer wants someone to read and respond to that email, and gives them a computer to do it with, the cost will suddenly be $1000. As I read the law, just one message a year would do it. Nothing seems to be in the law about modulating the tax to take account of whether you have the home computer 24/7, only sometimes on the weekends, or just during a busy month. Apparently, it is all or nothing.

What will people do? They will not accept a computer or phone from their employer any more. Instead, they will try to get by with an older machine, typically with older software, that they have at home. Instead of using the same institutional network both day and night, they will sign up for a separate system that costs less than 5000 DK a year. Corporate security will no doubt be compromised. Messages needed at work will occasionally be inaccessibly at home.

This "reform" will make Denmark less efficient. It may well retard the spread and use of the Internet. It will encourage people not to work at night or on weekends. It will hurt the efficiency of international contacts and likely hurt exports. It can easily compromise corporate IT security, as employees use home systems to avoid the extra tax. It could easily make the university a bit less efficient. This is another example of an inane Danish "reform" that was worked out in a private room between a couple of political parties without the benefit of public discussion.

I get hundreds of emails from students in the off hours, and I guess this means I should not answer any of them until I get to the office, no matter how important, such as the one I got an hour ago asking urgently for a letter of recommendation. Thank goodness in the future I will not read such messages until it is too late. Less work for me to do, and no job at all for the student!

The marvel is that Denmark on the whole is such a great place, despite its tax system.