Preparing for Post-Obama America

Preparing for Post-Obama America

A Political & Policy Analysis

By

Jay B Gaskill

Also at this link- http://jaygaskill.com/PostObamaAmerica.htm

IMAGINE waking up into the world where Barak Obama is no longer president of the United States.  You survey the state of the union and this is what you discover:

ü  That the national debt exceeds our gross domestic product;

ü  That our ongoing deficit, the annual debt service alone for which, if not checked will immediately exceed the federal government’s total interest expense for 2012 ($272 billion); the debt service is a growing sum that already exceeds the combined budgets for Human and Health Services, including Medicare/Medicaid (88 billion), Homeland Security (47 billion), NASA (19 billion) and Agriculture (19 billion) by about 99 billion;

ü  That the US   private economy (the breadwinner sector) is stuck on stagnant;

ü  That combined unemployment and underemployment exceeds 14%;

ü  That we are experiencing rapidly increasing energy price inflation;

ü  That emboldened enemies and adversaries throughout the world are circling like sharks, drawn to the smell of American blood in the water.

As I write this, the commentariat is buzzing with the belated bad news that average Americans have lost 40% of their net worth during the period between 2007 and 2010. This was mostly due to the decline in the value of a typical household’s main asset, the house and land of a primary residence.  It was a “paper” loss for most householders – the subset of owners who have no plans to sell right now.

The underreported news is that the actual losses had already taken place over a period of several decades. This was the period when American production of real goods and services began to hollow out; when investment money migrated to stable, non-productive assets as a safe haven, particularly to American real estate; and when fewer and fewer Americans worked in authentic, economically viable, profit-making enterprises.

An asset bubble was inevitable – because for those same years, the American dollar was the world’s reserve currency. The real estate bubble collapse was the inevitable outcome.

There is a reason we all use the term “paper” value.

There has been a steady erosion of the American standard of living, measured by real income in constant dollars against real goods and services.  Most of the impact has fallen on the middle class.  The statistics are subject to manipulation and reinterpretation, but the members of the loosely-defined middle class, even when still employed, have lost about 15% in real income over ten years.  This is dire for those who families and individuals who were operating on the edge, noticeable for those with a slight prosperity buffer, and troubling those who qualify as comfortably wealthy.

The USA has been living on borrowed time and money for three decades – blithely enjoying the illusion that all is well; after all, most of our portfolios looked pretty good… on paper.

Moreover, we were assured that, whenever those paper assets have dramatically fallen, we need only to wait it out until things come back.  This is how the day of reckoning was postponed for so long that the eventual adjustment will be brutal.

We are close to that brutal moment.  The scope and severity of the inevitable reckoning has been amplified by a factor of five because of the acceleration fiscal recklessness during the last three years.

This is why that no American president will be able to get through the first nine months of the first post-Obama term without aggressively and proactively attacking these vexing challenges; if they are ignored, that same president will get credit for an economic catastrophe of unprecedented severity.

How much time will the next president have?  If nothing significant is done to repair the debt imbalance, a credit/fiscal crash will probably take place sometime in the first 18 months of the next presidential term.

The bottom line: Whenever American borrowing becomes too difficult to sustain, the time for staged, careful adjustments will have run out. That will be an emergency in which 2008 crash will look in our collective rear view mirror like a minor fender bender.  The suddenly needed dramatic “revenue enhancements” in the form of hastily added taxes will crush any recovery.

In the context of the inevitable European (and likely Chinese) economic difficulties, a full-on depression is not out of the question.

We are facing a trap. Dramatically cutting government expenditures will drive up unemployment and depress consumption.  But dramatically expanding the US money supply will only slightly ease the debt burden and most certainly will ignite dangerous and debilitating inflation.  This is the classic fiscal trap, ramped up to the scale of a bad disaster movie.

Unfortunately this is reality, not a Hollywood production.  Fortunately, there is a way out. Our post-Obama president will have one big play, and it will need to work the very first time.

Before addressing that necessary set of coordinated moves, let’s take a moment to review the dilemma of British PM Margaret Thatcher, who faced strikingly similar challenges.

Thatcher served between 1979 and 1990, during a deep recession in which the English economy was crippled by decades of post-war socialist bureaucratic mismanagement. The national debt overhang was more than the UK’s GNP.

On taking office, Thatcher began to administer her brand of tough love, and ever so gradually, the economy responded. In 1982, UK inflation fell to an annual 8.6% from 18%.  But unemployment remained stubbornly high and economic reforms were stalled. The UK was then essentially in the same trap I’ve just described – crippling debt and no government ability to drive investment without setting off further inflation.

Enter the discovery of North Sea oil.  During the 80’s the Thatcher government was able to deploy a 90% tax on North Sea oil recovery, using the revenue from that source (i.e., using real, not fiat or borrowed money) to rebalance the debt-crippled economy and help defray the costs of reform – in which sclerotic public industries were privatized, one by one, freeing up new economic activity. By 1987, unemployment was falling and the economy was in a strong recovery with low inflation.

Here are some numbers for GDP and public spending under Thatcher from 1980 to 1990:

GDP up 23.3% / Total government spending: up12.9% / Law and order spending:  up 53.3% / Employment and training spending: up 33.3% / Health spending: up 31.8% / Social security spending: up 31.8%.

When the national debt exceeds the entire annual gross domestic product, as it currently does, we will not succeed in persuading a cohort of young adults to support a huge overhang of unproductive elders, unless we have a system in place that will reduce that debt load to a manageable level in their lifetimes.

This country’s debt load becomes unsustainable by definition when we cannot afford to pay the debt service without unacceptable sacrifices. The president who assumes office after Mr. Obama will have a very short period to adjust federal spending and revenues enough to reach fiscal balance – I estimate it must be done – within two budget cycles at most. The problem will be how to maintain essential services when that drastic belt tightening is done, while guiding the economy into a sustained period of real growth and high employment.

This is a tall order and one that will require real money from the sale of real goods and services to fix.

There is good news: The productive, profit-making “breadwinner” core of the US economy, the ultimate source of our real wealth, is currently so overburdened by a web of regulatory restrictions, petty tariffs, fees, taxes, and bureaucratic second-guessing, that the  cumulative political load on commerce is worthy of a third world economy. But the federal government has the power, the tools and can quickly acquire the expertise to so substantially lift this load that an investment and growth surge will result.

And we have a big ace in the hole to assist in the transition:

  • Within US territory and control there is an immense reserve of marketable energy resources (by far the largest in the entire world). This includes the largest known deposits of oil shale  in the world that, according to the Bureau of Land Management, holds over 2 trillion barrels of recoverable oil, far exceeding all of OPEC’s reserves, and enough for at least 200 years at current demand levels.
  • o The USA is the Saudi Arabia of coal. …Which can be converted to natural gas, oil and eventually, to gasoline.
  • We have enough natural gas both to meet our own needs and to be a major exporter. As Hoover scholar, Victor Davis Hanson has reminded us, “America will soon again be able to supply all of its own domestic natural-gas needs — perhaps for the next 90 years at present rates of consumption. We have recently become a net exporter of refined gas and diesel fuel, and already have cut imported oil from OPEC countries by 1 million barrels per day.”

{ http://www.nationalreview.com/articles/285197/oil-rich-america-victor-davis-hanson } In a later piece, Hanson added that “…3 to 4 million jobs will follow from new gas and oil production alone. That figure is aside from the greater employment that would accrue from reduced energy costs. Farmers, manufacturers, and heavy industries could gain an edge on their overseas competitors, as everything from fertilizer and plastics to shipping and electric power would become less expensive.”{ http://www.nationalreview.com/articles/294693/second-oil-revolution-victor-davis-hanson}

THE ONE BIG PLAY

The One Big Play left to the post-Obama president is a set of coordinated moves beginning with the preparation of public opinion for major adjustments.

  • The deregulation piece, with a special emphasis on the energy sector, is an urgent priority because of the lead times (for example, oil shale recovery and extraction technology is complicated), the nature of the opposition (environmental and global warming arguments will need to be met head on) and the revenue generating issues (one doubts that the US  could get away with anything like the 90% North Sea oil extraction tax, for example), but the potential gain for federal revenues, private sector jobs and the general economy provide a compelling argument to get this part done ASAP.
  • The other deregulation measures are equally complicated but can be attacked by a clear, overarching mandate, using the same “commerce clause” authority to remove regulations that was used to impose them in the first place.  For example, in the context of a streamlined Environmental Impact Report requirement, more narrowly focused on public health concerns, an Economic impact Report could be imposed applying to any prospective new regulation that could potentially hurt commerce or employment. {More on this concept is posted in 3 articles at: http://jaygaskill.com/Breakout1.0.htm and http://jaygaskill.com/Breakout2.0.htm and http://jaygaskill.com/BREAKOUT3.0.htm.}
  • The fiscal normalization piece will necessarily address every element of the problem, starting with a comprehensive freeze on all new spending, including COLAS, then proceeding to a general reduction of all federal salaries and staffing levels, mitigated and refined by a function-level review of tasks and priorities. The Paul Ryan proposals or some variation will be a starting point, but, in my opinion, no one inside the Beltway has yet publically come to grips with the true severity and scope of the task.  Entitlements may or may not be the third rail of politics, but walking on that hot rail is child’s-play compared to dealing with the consequences of delay and denial.  I suspect that a large number of otherwise smart staffers and elected officials will be shocked to learn how little time actually remains to fix this.
  • The public opinion piece calls for a calm, bright-line exposition of the nature of the problem and the clearest outline of the necessary solutions that is humanly possible.  Because actions speak even when words are ignored, I am personally convinced that the new president needs to start the public education process with several dramatic, concrete actions, including an immediate, substantial, across-the-board reduction in executive salaries, POTUS and staff to lead the pack, followed by the congress and all agencies and bureaus.  And that is just to get everyone’s attention, and to convey, as nothing short of such a startling measure can do, that this time the leader of the freest country in an un-free world means business.

Then the heavy lifting begins. The deregulation and energy boom piece follows naturally, enabling the administration to end with an optimistic flourish – showing that there is a realistic point to all this sacrifice, that America will be back, stronger than ever.

WHAT IF BARACK OBAMA IS THE POST-OBAMA PRESIDENT?

Neither rhetoric nor charm can change reality. The policy issues, the nature and scope of the coming crisis, and the optimum line towards national recovery will not have changed a bit by January 20, 2013. They are the “reality on the ground”.

If you are persuaded in spite of all this that this incumbent president will rise to the occasion and salvage a renewed American from this mess, then I salute you; for your optimism far exceeds mine.

This challenge the United States will soon face is every bit as serious as WWII and the Great Depression. Some our best contemporary leaders are not up to it.

Our most realistic prospect of success is with a change of teams; fresh eyes on the problem; a president with an understanding of the business system; a leader endowed with the sturdy willingness to take on entrenched forces that have brought us to this pass.

The rest is up the willingness of American people and their elected representatives to do what it takes.

Sadly, nothing in this incumbent president’s performance has so far led me to suspect that he is or can become the leader we need, or that he is willing and able to do what so obviously must be done.

God save America.

JBG

Copyright © 2012 by Jay B Gaskill, attorney at law

This was first published on The Policy Think Site and the linked blogs.

As always, forwards, links and quotations with attribution are welcome and encouraged.  For everything else, please contact the author via email – law@jaygaskill.com.

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