highline56 op ed

I served as ambassador in the Philippines for three months in mid-1985, having been called back from retirement to fill in there. We had a terrific time, but the situation is discouraging -- way too many people in too little space, and limited economic opportunities. One niche they do have, however, is a significant number of people who speak good "Murrican English." This was one part of our colonial heritage -- together with excellent golf courses. As a result, one of the top business sectors is call-back centers. They are second only to India is the number of such facilities. And by the way, the biggest one is at what used to be Clark Air Force Base. The base is long gone, partly the result of failed negotiations in the latter part of the Marcos era, but mainly the result of the volcano, Mt. Pinatubo, which destroyed large parts of the base in about 1989(?). We have no bases in the Philippines now, not Clark and not Subic Bay Naval Base, and we have no permanently-stationed troops there at all (although we do have fairly extensive military assistance programs). On other related topics, Tagalog is the official national language, but it is mainly spoken in Luzon, the largest island, where Manila is located. But it is not widely spoken in the more remote islands, including Mindanao, which has been the home of most o f the security problems in recent decades, dating back long before 9/11 and the current Global War on Terror (also known as GWOT). In my three months in the Phils, I went to Mindanao five times, including Davao and Zamboanga. All of these visits were for the dedication of US-Philippine assistance projects -- new schools in remote strongholds of some of the real baddies, or small bridges to help farmers, or community education/training programs, or rural housing and agriculture projects. Most of these areas have had large Muslim minorities, or in some cases majorities, for centuries, and they were never fully assimilated into predominantly Catholic Philippine culture. Which reminds me of a cliche Filippinos say about themselves, and the cultural influences of their two colonial overlords, the Spanish and the Americans: they say they lived in a convent for 300 years, and in Hollywood for 50.

Zamboanga is a pleasant tropical city of about 300,000 located on the far southwest corner of the island of Mindanao, the largest of the Philippine islands (Luzon has a much larger population, and is about the same size). It is close to the farthest reaches of the Philippines, Indonesia and Malaysia, and the small islands west of Zamboanga (Basilan, Jolo and others) have been terrorist havens for decades. The US supports Philippine efforts to build schools and medical clinics and bridges and docks and other infrastructure to encourage loyalty -- or at least passive acceptance -- toward the Manila government, which is a long ways away, literally and figuratively. These efforts have been somewhat effective, in part because the terrorists (the Abu Sayaf Group, the Moro National Liberation Front, Jamma Islamiya) are really brutal, but mainly because people want to be on the winning side. As for scenes from the colonial era in the Philippines that resemble The Ugly American (which was actually set in Thailand, by the way), the impression is accurate up to a point. But it is also true that Filipinos love Americans. One question I got numerous times was, "Why can't we become the 51st state?" The week I arrived, I presided over a movie premier about a daring rescue operation in the latter days of WWII, where Filipino guides helped untrained Americans liberate, with zero casualties, a Japanese POW camp holding 600 Americans and a few Aussies. It's a true story which virtually all Filipinos know. But I had never heard of it. There are examples of shared American and Filipino history all over the place, and MacArthur lives, from Corregidor to Leyte Gulf to the Manila Hotel! Unfortunately for those who have to live with today's realities rather than yesterday's dreams, the population (90 m) is far in excess of the economic or political capacity to support or govern, and the Philippines has gone from being the richest country in East Asia after WWII to being one of the poorest. President Arroyo enjoys very little respect, especially conpared to her movie star predecessor, Erap Estrada, who made little effort to govern, and to his predecessor, Gen. Fidel Ramos, who remains very popular. The society is very hierarchical, with a few hundred people at the top (mostly educated in the US) and millions at the bottom. In sum, it's a fine place to visit, but a somewht uncomfortable place to live.

On Gordy's post:

Excellent, and as expected, I totally agree with the policies implied in your questions. Also about income taxes. I would like to discuss a couple of points. I don’t believe we can foist any of our debt, i.e. excess consumption, onto the next generation. As you point out, we can only consume today’s resources. While it is inherent in your third point about how government “pays” for expenditures, in my view it matters not whether it is printed money or borrowed money. The result is inflation, the least equitable tax of all. As you say, there is no free lunch. You can’t even steal it. If we just “borrowed” from ourselves, the result is clear enough. When we borrow from foreign countries, it gets a bit more complicated. We send them dollars or debt (not sure there is any difference) and they send us goods. Then the trade deficit eats away the value of the dollar. If we can keep that going forever (ignoring the other problems that this creates) we have successfully stolen goods from the foreign countries. You would think that after a while it is going to dawn on them that all those “sales” that keep things humming in their factories are only beneficial if they are paid for. There are indications now that China is catching on.

The Bush tax cuts were irresponsible, and his only excuse is ignorance and demonstrated incompetence. So sad that McCain thinks he has to switch to match the irresponsibility to get elected. Like all the rest of his positions, which used to make him appear to be a valid alternative. However, as long as the voters can be distracted by the fun stuff like lipstick on a pig, I fear it all may work. All you have to do is fool some of the people some of the time. Too bad.

I think I have voted Republican most of the time, but what I don’t understand is these people that will vote Republican all of the time, no matter who is running. There is something bad wrong with them. Particularly this time.

Gordy response:

Thanks for your insightful comments. You hit on a very cogent point. Printing money and and creating credit is all the same. I usually avoid this argument because nearly all economic theory claims that only money matters and credit can be ignored. If you look in the index of any of Milton Friedman's books, "credit" is not to be found. It is not even to be found in Bernanke's textbook which is used by more than 250 college Economic professors.

I think we underestimate the acuity of the Chinese. They have over $1 trillion of our debt which they have accumulated through balance of trade surpluses with us. They know, as we know, that they will not be paid back in equal value. On the other hand, look what they have accomplished. They have built an economic juggernaut while literally obliterating many of our industries, encouraged us to over-consume, thus reducing our investment, contributed greatly to our bloated financial system and have weakened the $US as a reserve currency. Let's say the lose 1/2 of the value. Compare this cost to what we get for the same amount in our middle-east wars. I think they may have made a pretty good investment. Further, they have solved a demographic problem. They had 90 million people added to their workforce in the last 15 years. It gave them something to do. As you noted, it is begining to change. They have their industries, they have our money, and they are going to lose 85 million workers over the next 15 years as their population ages. As a friend, who used to be in the import business told me this week, we had better get used to going barefoot because we have no shoe manufacturers left.

I think the Super Collider is absolutely fascinating. I think they are going to prove my theory about the creation of our universe. It was created by a highschool student as his science project in a universe in a different dimension. He slammed a couple of his or her atoms together and a tiny bit migrated to our 4 dimensional reality. That was the seed for the big bang. From then on its all history.

I haven't reconciled this theory with the NW Indian belief that a raven, picked up a stone, flew too close to the sun, dropped it and it became our earth. But, give me time. It seems to make as much sense as other explanations I have heard.

In a few weeks, we will be voting in the most important election in our lifetime. There is much discussion about the relatively inconsequential personal issues of race, gender, and social status. In spite of the noise and spin, there are major issues, including:

Whether we should have an energy policy that includes consumption as well as non petroleum based energy sources or just drill, drill, drill.
Whether we should advance our interests in the world primarily through negotiation or through the threat and actual use of force.
Whether we should expeditiously end the wars in which we are engaged, or should they be continued indefinitely until some sort of victory is defined and accomplished.
Whether we should engage in other pre-emptive wars.
Whether we should have a policy and actions to limit greenhouse gasses.
Whether we support or deny equal pay for equal work and whether women should have the right to choose abortion.
Whether we should teach religious based doctrines such as “creationism” and “abstinence only” in our public schools.
Whether spying on citizens without warrant or probable cause is acceptable.
Whether we accept torture as an interrogation tool.
Whether we support Habeas Corpus for all people under our control.
Whether the Federal Government should contravene state and local government’s laws regarding environmental and social issues such as marijuana restrictions, gay unions, and gun control.
Whether we should support stem-cell research.
Who we wish to fill the vacancies of likely two and, possibly three, of the more liberal Supreme Court judges. A shift to the right would undoubtedly reverse Roe vs. Wade and would likely have impact on Freedom of Speech, Separation of Powers, and Habeas Corpus.
Whether tax cuts and free markets alone will reverse our economic and financial woes.
Whether the solution to immigration is higher fences, more border patrol, and incarcerations or developing polices which take into account our benefits vs. our costs of immigration and addressing the root causes.
Whether we should adopt policies and programs to provide health care for the nearly 50 million that have no medical insurance.

This is not an exhaustive list but does highlight some of the more important issues. They are reasonably easy to understand and everyone can make up their own minds where they stand on these issues.

The one important issue that there seems to be a great deal of misinformation about is taxes. Many of my peers claim that taxes are their number one issue. Obama would raise them while McCain wants to lower them. I suspect some of the people that take that position are really using it as an excuse to justify their vote for McCain while the real reasons lie elsewhere. It would be similar to the Palin nomination which may be an excuse to vote against Obama, but is not a rational reason to vote for Mc Cain.

None-the-less, there are many whose primary issue is taxes which I will discuss.

First, much of the campaign rhetoric can be ignored. McCain says that Obama will raise taxes while he will lower them. Obama says his tax proposal would lower taxes for 95% of the people. The New York Times last week said, after analyzing both positions, that there is little material difference.

McCain infers that tax cuts can be funded by eliminating earmarks. Earmarks are special projects authorized by Congress and approved by the president. They allow Congressmen to show their constituents that they are looking out for their interests in Washington. Some are worthwhile projects, while others, like the “bridge to nowhere,” are not so good. In any event, the people in the receiving districts love them as do the politicians who fight for them. They help them get re-elected. Sarah Palin needn’t apologize for trying to get plums for her constituents, but it is ingenious to claim that she is opposed to earmarks because she switched her support for the “bridge to nowhere” after it was dead in Congress. And, even though she said “no thanks” to the bridge after it was dead, she did not return the money, but rather, used it for other pork barrel projects.

Let’s put earmarks into perspective, they amount to about $18 billion per year or a little more than ½ % of Federal expenditures. They are relatively inconsequential and are not going away. The president has little influence over them and it is not a rational presidential campaign issue. Presidential, “line item veto,” which will not happen, would only further politicize the process.

So let’s finally get down to the meat of the issue, income taxes, higher or lower?

Let’s first look at a macro-economic view. It is forecast that our total goods and services to be produced in the U. S. over the next year will be approximately $15 trillion. Government expenditures, not including wars, will be about 21% of that amount. As you can see, from an economic standpoint, government expenditures are coming out of the economy on a current basis. It doesn’t matter whether it is surgery for a Medicare patient or a bomb that explodes in Iraq. The economic cost is the year in which it is spent or used. The economic cost of a war is the year in which it is fought. That which is spent on a war is production of goods and services that could have presumably been channeled to some other useful purpose either by government or the private sector.

Notice, from an economic standpoint, there is no consideration as to how the Government gets the money to pay for its expenditures.

So, how does the government pay for its expenditures?

It can tax it citizens and corporations.
It can issue IOU’s (Treasuries) to its citizens.
It can issue IOU’s to the Federal Reserve which, in effect, prints money to pay for them.
It can borrow from foreigners.

Those are essentially the only material choices.

The question is what is the best mix of these choices for the long term economic benefit of our country and, for us as and our families individually?

In looking at the list above, there are really two fundamental choices, taxing or deficit financing, as items 2-4 are all related to borrowing. The projected Budget for 2009 is a historic high Federal deficit of $480 billion, not including the cost of our wars which will add another $180 billion or more, plus, the likely elimination of the alternative minimum tax at $60 billion, and the cost of financial bailouts. It amounts to more than $2,000 per person in the U.S.

The projected taxes for the 2009 Budget includes $1,259 billion income taxes, $949 billion in Social Security taxes, and $339 billion in corporate taxes. You will note that Social Security taxes are just government revenues, like any other, and are not set aside for Social Security benefits.

It is fundamental to our tax system that it be equitable and just. Everyone can decide whether, a 13.5% Social Security sur-tax, beyond normal income tax, which falls almost exclusively on workers, is appropriate. Or, that a maximum of 15% capital gains tax which overwhelmingly favors the rich, meets those criteria. An early issue for the next president will be decision to continue the Bush tax cuts beyond their scheduled expiration in 2010. Continuation of the tax cuts will add $1 trillion to our Federal deficits over the ensuing four years. Fifty-two per cent of the tax cuts will go to the top 1% of incomes.

So, if the economic costs of government expenditures are the same, regardless of how they are paid, why not just tax and be done with it? Well, the problem with taxes is that you know specifically who, when, and how the bill is being paid. That is both its advantage and disadvantage.

Paying for Government expenditures with debt gives the immediate impression that no one will have to pay, but the reality is someone will pay, you just don’t know who, how, or when. Most economists complain that future generations are going to have to pay off our debts. Why would we expect that the next generations will become our economic slaves by taxing themselves of their production to pay for Treasuries that we issued to ourselves and foreigners? In other words, they think that our generation can consume everything we produce and then consume what the next generation produces. Not likely. How do our progeny walk away from these obligations? They simply deficit spend and inflate just as we have done. They will do exactly as we have taught them to do. Unfortunately, for the holders of those Treasuries, their purchasing power will fall. Future generations will diminish the value of the Treasuries we have issued through continued inflationary policies.

But, the more urgent problem with the deficits is that it destroys our economy. As the Government increases its share of the economy, individuals increase their debt to maintain their standard of living. The increase in debt in both the private and public sectors without corresponding increases in the real economy causes inflation in asset prices. The increase in prices of securities and real estate gives confidence to borrow and consume even more. This has incredibly spiraled without restrictions to the point where we have a negative economic savings rate and hence negative investment. With negative investment in education, infrastructure, and capital equipment there is continued economic gloom as far as the eye can see.

Further, the asset appreciation we have enjoyed in real estate and securities prices is nothing more than fool’s gold as we have not built the foundation for a strong economy. It is relatively easy to fool ourselves for a while, but it is impossible to change the basic economics of bad policy. Either through inflation or deflation the value of the asset claims on our economy will be diminished in value to the level that the real economy can support them. Sorry, there is no free lunch.

The deficits also lead to the unsustainable and equally dangerous balance of trade deficits which can be visited at another time as well as whether more deficits in the future will stimulate the economy or will be a further drag.

In summary, Federal deficits are destroying our economy for following generations and may not even spare us from the collapse of the prices we use to measure our personal wealth.

In short, we should not succumb to the siren song of lower taxes but, rather, that we need to equitably increase taxes to shrink our disastrous deficits. And, that those expenditures which are made are done judiciously, in the best interest of the country, today, and in the future. Only when this happens will we be on the road to true economic recovery.

For those, who still take a “me first” approach and think that lower taxes are in their personal best interest, they should look at their portfolios and compare their recent debt induced performance compared to the tax savings they hope to gain in the future.

Finally, for my generation, who inherited a healthy and robust economy which we have dissipated through profligate use of resources, over consumption, and insufficient investment, while allowing a grotesque, bloated, and distended financial system to evolve, we need to use our remaining time and energy to force the economic, financial, and fiscal changes necessary for the economic wellbeing of our children and grandchildren. And, it starts with our choices in the coming election.


gordy ringoen

9/10/08