A Rusting City

A Rusting City

“I’ve spoken of the shining city all my political life, but I don’t know if I ever quite communicated what I saw when I said it.  But in my mind it was a tall, proud city built on rocks stronger than oceans, windswept, God-blessed, and teeming with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity.  And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here.  That’s how I saw it, and see it still.  And how stands the city on this winter night?  More prosperous, more secure and happier than it was eight years ago…. And she’s still a beacon, still a magnet for all who must have freedom…”   —  Farewell Address to the Nation, January 11, 1989

By J.M. Hamilton 6-30-12

It was a dark and stormy night.   No, let’s start over.

Once upon a time, a very eloquent leader came to be elected to run a tarnished and rusting city.  The city had fallen into disrepair and faced double-digit unemployment, inflation, and interest rates (mostly because the city had been taken off the gold standard by a prior administrator, and the printing presses had been maxed out to gain a mayoral second term).  An index was even created to measure just how bad things had become for the citizens, a “misery index.”   Times were indeed difficult.  The leader was a gifted orator and roused his tribe/Party against government; he talked down government programs, oppressive taxation, and government regulation; and he spoke proudly of the private sector, capitalism, and privatization.

But the wise ruler also was smart enough to remember the great depression, and at one time had actually been a democrat. Oh my!

A Democrat in Wolf’s Clothing?

And yet, there seemed to be a wide divergence between the mayor’s rhetoric and his actual policies.  For despite his strong anti-government language, the leader didn’t have the heart to cut government programs for the elderly.  In fact government spending and entitlements expanded and grew, as did deficit spending; he also protected the city’s workers and jobs from the free trade policy he advocated, with tariffs and barriers to trade; and the renown mayor of the city raised taxes no less than eleven times during his two terms, and yet, the deficits – government spending versus tax revenue – grew and grew.  The top tax rate for the largest wage earners was 50% for much of the great communicator’s terms in office.

Despite the mayor’s policies, the city – possibly by shear force of his charm and persuasion – prospered.   While others saw through the leader’s verbal skills and recognized that he had merely adopted liberal economic policy – held widely in disrepute within the mayor’s Party, commonly known as Keynesian Economics; the leader claimed that the free market, tax cuts, and deregulation had brought the city back and made her shiny again, while failing to acknowledge government’s role (both fiscal and monetary policy) in his and the city’s success.  After eight long years, the mayor retired for well-earned rest and relaxation.  Indeed, he seemingly had done very well.

Except the mayor’s words appeared to have cast an enchanted spell.

The leader was remembered very fondly, and over time his political Party/tribe built a cult of personality around him and his ideology.  The Party remembered with great relish the great communicator’s words, all the while ignoring or wishing away his actions and deeds.  Or attributing the continuing problems of the city — rampant fiscal profligacy and deficit spending — to a failure to cut revenue/taxes.  The Party, which prided itself on its tremendous business acumen, seemingly believed that while no business could spend indefinitely without raising revenue/increasing sales, apparently believed that government was magical and that it could continue to grow and spend indefinitely without raising revenue/taxes.  By sorcery, the Laffer Curve, and supply side economics, the Party of the great leader wished away the government’s deficits but did nothing to stop its “borrow and spend policies.”

What Big Teeth You Have…Grandma

What’s worse the Party ignored their leaders practice – and track record – to avoid foreign entanglements and wars.  Instead, the Party began to fight in foreign lands seemingly endless wars, or battles to protect oil rich cities, all to the great benefit of: trade routes, “managed” energy production, commercial and sovereign interests, and two of the Party’s greatest benefactors, the military industrial complex and Big Oil.  However, these wars cost the city greatly in terms of blood and treasure, and while they caused a short-term boom in her economy, they often left the shiny city winded financially, morally, and martially (for taxes had been not raised to pay for city’s foreign adventures — indeed, they had been cut).  Denizens of the world often wondered why the shiny city, often fought in resource rich lands, protecting the interest’s of dictators and despots, while contrary to the City’s ideal, she often ignored human rights atrocities committed by dictators in lands that were not resource rich or had minimal links to the city’s economy or business interests.  Worse still, when the city was at the apogee of her power, she failed to spread democracy and stability globally; but rather, continued to support military and authoritarian regimes, an opportunity squandered.

And I’ll Huff and I’ll Puff and I’ll Blow Your House Down…

But worst of all, the great communicator’s Party – having completely abandoned the financial rules and regulations put in place after the great depression, such as Glass-Steagall – allowed the city’s banks to gamble and engage in idle speculation, at the expense of the city’s economy and the banks traditional role of lending to the fair city’s citizens and businesses.  A tremendous bubble ensued, and the city’s real estate market came crashing down, and with it a lifetime of accumulated wealth, and the livelihood of a great many of the city’s businesses and inhabitants.  Worse still, it turned out that the city’s banks had bet against the city and her people, and some of the banks very own products, and the banks reaped significant financial reward for their wickedness in the city lead bailout.

Separately the tax code had been turned to Swiss cheese; the Party having been lobbied to create loopholes for the rich and the powerful – and having accepted large political campaign contributions – acquiesced to many demands.  The city’s budget was now ruinous, and she could no longer provide basic services for her people or make good on her financial commitments.  The city’s central banker took to printing money to pay for the city’s massive debts and tax cuts for the rich, the Party had so favored.

In the end, the Party’s and the leader’s free enterprise and anti-government language had become such a cornerstone of their beliefs that businesses and entire sectors of the city’s economy were given free reign and allowed to merge and denigrate into mere monopoly.  The cartels often worked directly at cross-purposes with the city’s consumers, the city’s labor force, her financial health, and the city’s once great markets.  Contrary to the great leader’s policies and actions that helped and aided the city’s workers and her markets, trade barriers were taken down, “free trade” agreements ratified, and many of the city’s jobs were sent offshore – which only made the city’s fiscal crisis worse, so diminished now was the city’s tax base.

Yes, inexpensive products were exported back to the shiny city and her once great markets, but who could afford them, with such high unemployment rates, depressed wage levels, and monopolies preying upon the citizenry for limited discretionary income?

The shiny city and the Party listened to the great communicators words, and ignored his actions at their own peril, and the city fell into disrepair, was over extended fiscally, and the need to print money to pay her bills, and for additional bank bailouts, grew greater.  Over the span of time, and contrary to the Party’s and the leader’s speeches, the shiny city had adopted the liberal economist Keynes’ policies almost to the letter.  Moreover, redistributed wealth was not shared equally for a just and fair society; but rather, it went to the wealthy, often in the form of tax cuts, bailouts, special regulations, inflationary monetary policy, and accounting magic and subsidies.

The city soon grew rusty again, along with her infrastructure, and she was ill prepared for the next calamity to come, because she had squandered her treasure and credit line.

In a final irony, the great leader, along with his city, counted among their many successes their signature achievement – the dismantling of a withering crony empire.  Ultimately, in many ways the shiny city was rapidly becoming the very thing she and her citizens had fought a great cold war against, an empire that was overextended economically, militarily, financially and intellectually.

After a thirty-year reign, the Party and many of the leader’s words became little more than a fairy tale.

For while the free market and capitalism are great producers of wealth, the free market works best when partnered with a strong and healthy government to ameliorate private enterprises worst attributes: that of monopoly, concentration of wealth and power, cronyism, and government and regulatory capture.

The great communicator knew this, and his actions revealed as much, but his rhetoric, almost spell like, had been twisted to a very bad end, indeed.

And the moral of the story:  Watch both the words and actions of actors turned politician.  For while actions speak louder than words, sometimes a leader’s words, unintentionally, may have damaging consequences for future generations.

P.S.

And the mayor’s lasting legacy? The mayor showed us that when the debt to GDP ratio is low, anyone – even a public relations man from General Electric – can kick start an economy by adopting Keynesian fiscal and monetary policy; what takes discipline, foresight and good stewardship is raising taxes during prosperous times.

Ultimately, the mayor’s lasting legacy was his dark words against government turned a generation off on public service, so that the city – all too often – became led by easily manipulated second-string hacks, extremist, and political opportunist.  Subsequently, malaise and lost decades ensued.

The End.

 Copyright JM Hamilton Publishing 2013