Suicide of a Superpower_Will America Survive to 2025? Page 3

  Since the Cold War, America has been playing empire—punishing evil-doers and advancing democracy—in Panama, Somalia, Haiti, Bosnia, Kosovo, Kuwait, Iraq, Afghanistan, and Libya. China has fought no one but built up her military power and developed ties to an expanding number of nations at odds with America, from Russia to Iran to Sudan to Venezuela.

  The Chinese today call to mind nineteenth-century Americans who shoved aside Mexicans, Indians, and Spanish to populate a continent, build a mighty nation, challenge the superpower of the day, the British Empire, and sweep past her to become the most powerful nation on earth. Men were as awed by America then as they are awed by China today.

  During the Cold War, China was in the grip of a millenarian Maoist ideology that blinded her to her true national interests. Today, it is America that is the captive of an ideology that is becoming perilous to the republic.

  The people sense this danger, and the politicians are responding. The election of 2010 featured a series of inflammatory political ads that reflected the nation’s anxiety about high unemployment and painted China as profiting from America’s pain. In late October, the Washington Post reported:

  On the campaign trail, both Democrats and Republicans are slinging mud at China. Currently, 250 ads targeting China are being aired in just under half of the 100 competitive districts, such as the battle for the Senate seat in Pennsylvania between Republican Pat Toomey and Democrat Joe Sestak. Sestak’s ads come equipped with a gong and this line: “Pat Toomey—he’s fighting for jobs … in China. Maybe he ought to run for Senate … in China.”

  At a news conference in October 2010, Democrat Alexi Giannoulias accused Republican Mark Kirk—with whom he was locked in a tight race in Illinois for President Obama’s old Senate seat—of “economic treason” for raising money from American businessmen based in China.

  Said Evan Tracey, president of the Campaign Media Analysis Group, “political ads are the leading indicator of the next set of policies.”29

  HOW CHINA FIGHTS—AND WINS

  At the Walmart in Albany, Georgia, tires made in China were selling for less than tires made at the Cooper Tire plant just down the road. Unable to compete, Cooper Tire shut down its Albany plant, and 2,100 Georgians lost their jobs. How could tires made on the other side of the world, shipped to the USA, then moved by rail or truck to Albany, Georgia, be sold for less than tires made in Albany, Georgia? The Washington Post’s Peter Whoriskey solves the mystery: at Cooper, the wages were $18 to $21 per hour; in China, a fraction of that. The Albany factory was subject to U.S. health-and-safety, wage-and-hour, and civil rights laws, from which Chinese plants are exempt. At the Cooper plant, environmental standards had to be met or the factory would be shut down. China’s factories are notorious polluters.

  China won the competition because the Fourteenth Amendment’s “equal protection of the laws” does not apply to the People’s Republic. China can pay its workers little, force them to work longer, and operate plants whose health, safety, and environmental standards would have their U.S. competitors shut down as public nuisances. Beijing also undervalues its currency to keep export prices low and import prices high. Thus did China, between 2004 and 2008, triple her share of the U.S. tire market from 5 percent to 17 percent, and put Cooper Tire of Albany out of business.

  Having seen the future, Cooper Tire is now opening and acquiring tire plants in China and sending its former Albany workers over to train the Chinese who took their jobs. Welcome to twenty-first-century America, where globalism has become the civil religion of our political and corporate elite.30

  WHO BUILT THE DEBT BOMB?

  Neither a borrower nor a lender be, said Shakespeare’s Polonius. But when the Greatest Generation passed the torch to the baby boomers, we became both.

  Auto loans were made at zero interest for sixty months by the lending arms of GM, Ford, and Chrysler, to people who could not afford what they drove off the lot. Student loans were lavished on high school graduates with little prospect of finishing college. Unsolicited credit cards were sent to college seniors. States strapped for cash issued bonds to cover current expenditures. Under Bush II, the U.S. government ran up $2.5 trillion in deficits to finance tax cuts, two wars, Medicare drug benefits, No Child Left Behind, and what Fred Barnes celebrated, two decades ago, as “big government conservatism.”

  But it was the housing bubble that burst on Bush’s watch and brought down the stock and bond markets and almost took down the U.S. economy with it. The housing bubble began with an innovation called the subprime mortgage. These mortgages were blessed and given impetus by George W. Bush after he discovered a new inequality in society. To address it he called a White House Conference on Increasing Minority Homeownership and, on October 15, 2002, at George Washington University, Bush, in echo of JFK pledging to put a man on the moon by decade’s end, announced a new national goal:

  We have a problem here in America because fewer than half of the Hispanics and half the African Americans own their home. That’s a home ownership gap … we’ve got to work together to close for the good of our country, for the sake of a more hopeful future.

  We’ve got to work to knock down the barriers that have created a home ownership gap.

  I set an ambitious goal … that by the end of this decade we’ll increase the number of minority homeowners by at least 5.5 million families. (Applause.) … And it’s going to require a strong commitment from those of you involved in the housing industry.31

  What was wrong with this plan?

  First, it was based on a superficial analysis. While Hispanics had a homeownership rate of 47 percent to whites’ 75 percent, the difference was only 5 percent if one compared white Americans and native-born Hispanics. Immigrants have traditionally had a lower rate of home ownership. And as columnist Larry Elder points out, “The 1990 Census … found Chinese immigrants approximately 20 percent more likely than whites to own their own home in San Francisco, Los Angeles, and New York.”32 Were banks discriminating against whites in favor of Chinese?

  As to those “barriers” to black homeownership, writes Elder:

  Bush failed to address the primary reason that some blacks fail to qualify for homes—poor credit records. U.S. News & World Report found that the Fed’s own Freddie Mac released a report in 1999 showing that 48 percent of blacks are likely to have bad credit histories—almost twice the 27 percent rate of whites. That same year, the Washington Post found that the credit rating for blacks earning between $65,000 and $75,000 stood lower than that of whites earning $25,000 a year or less. Even National Urban League president Hugh Price said, “If people have bad credit, they’ll be denied loans, end of story.”33

  Ignoring the real causes of racial disparity in home ownership—age, income, length of residency, and the credit ratings of mortgage applicants—the Bush administration plowed ahead in the same suicidal direction the Congress had set out on years before with the Community Reinvestment Act. Local banks were pressured to make mortgages to home-buyers who could not qualify under standards set from decades of experience. Millions of these sub-prime mortgages were then sold by the banks that made them to Fannie Mae and Freddie Mac. The banks thus had fresh money to go out and make more risky mortgages and sell those to Fannie and Freddie. The mortgages were then bundled into securities and sold to Wall Street banks anxious to have on their balance sheets income-producing paper backed by real property in America’s booming housing market. As Bloomberg’s Betty Liu and Matthew Leising reported:

  The debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks grew an average of $184 billion annually from 1998 to 2008, helping fuel a bubble that drove home prices up by 107 percent between 2000 and mid-2006, according to the S&P/Case-Shiller Home-Price Index.34

  By mid-2006, not yet four years after Bush’s speech, minority home ownership had grown by 2.7 million, trumpeted the Weekly Standard, in “Closing the Gap: The Quiet Success of the Bush Administration’s Push for Home Ownership.”35

 
; New York-based AIG, among the world’s largest financial and insurance institutions, launched a program to insure the banks against losses should the housing market crash. As the risk seemed minuscule, so were the premiums. But payouts, should it come to that, were far beyond the capacity of AIG. In its financial products division in Connecticut and London, young wizards were at work creating credit default swaps to guarantee against losses.

  The Federal Reserve kept the game going by keeping interest rates low and money gushing, creating a bubble that saw home prices surging annually at 10, 15, and 20 percent.

  As the economy began to heat up, the Fed began to apply the brakes. Money became tighter, mortgage terms tougher. Housing prices stabilized, then began to fall. Homeowners with subprime mortgages found they could not “flip,” or sell, their houses and had to start paying down principal. People began to walk away from homes. The bubble popped. Folks awoke to the reality that housing prices can fall, as well as rise, and word went out that all that mortgage-backed paper that had been bought by banks all over the world was overvalued and that a good bit of it was worthless. As housing prices began to fall below the face value of mortgages, more and more homeowners mailed the keys back to the bank. And so the crash came and the panic ensued.

  Who is to blame for the greatest crash since 1929–1933?

  Their name is legion. The banks that made the subprime mortgages. The politicians who pushed them to make loans they would never have made without threats, promises of political favor, or the ability to offload the paper onto Fannie Mae and Freddie Mac. Fannie and Freddie, who bought up the subprime paper, massaged the politicians with campaign contributions, and walked away from the wreckage leaving taxpayers with a bill of hundreds of billions of dollars.

  Then there are the Wall Street bankers who bought up the securities backed by subprime mortgages and were too ignorant, indolent, or just plain greedy to inspect the paper. There are the ratings agencies like Moody’s and Standard & Poor’s who gazed at the paper and graded it AAA prime. In short, the political and financial elite of a generation revealed itself to be unfit to lead a great nation. 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 was made only for a moral and religious people. It is wholly inadequate to the government of any other.”36

  FAT CITY IN LEAN TIMES

  “It’s time to stop worrying about the deficit—and start panicking about the debt,” the Washington Post editorial warned. “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 2018.37

  Focusing on the “public debt”—the debt held by citizens, corporations, pension funds, and foreign governments—understates the true national debt, which is well over $14 trillion. But even that figure 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 General Accounting Office, these unfunded liabilities total $62 trillion.38 With the first wave of baby boomers reaching eligibility for full Social Security benefits in 2011, and the entire boomer generation moving onto the rolls by 2029, an Everest of debt will become visible to the world. What are the risks of the exploding U.S. public debt?

  Chinese, Japanese, and Persian Gulf governments and sovereign wealth funds will come to 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 either 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, and this increase in rates will push 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 Congress aware of the peril? In 2009, Congress was surely not. The lead story in the December 14 edition of the Washington Post 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.” The total cost of the Senate bill was enormous—“$1.1 trillion, including average spending increases of 10 percent for dozens of federal agencies.”39

  That last figure bears repeating. Staring at trillion-dollar deficits to the horizon, a Congress dominated by Democrats, the Party of Government, had voted all federal agencies an average budget increase of 10 percent. Bad times for America are the best of times for D.C.

  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 LBJ’s Great Society and Bush had added his trillion-dollar wars and trillion-dollar tax cuts. By the end of his presidency, conservatives were calling Bush our first Great Society Republican.

  Yet Senator Dick Durbin said in 2009 that more spending was needed “to keep cops on the street.… so that families feel secure.… Money spent to help our first responders, firefighters and policemen is a critical investment.”40 But are not cops, firemen and first responders a state and local responsibility?

  “It is business as usual, spending money like a drunken sailor,” said John McCain.41 But when sailors get drunk on shore leave they spend their own money. When they get back aboard ship, they sober up. Congressmen never stop spending. It is what they do. But the money they are spending now must be paid back by future generations.

  The Democrats were following rule one of White House chief of staff Rahm Emanuel: “Never allow a crisis to go to waste. They are opportunities to do big things.”42 Small things, too. According to Taxpayers for Common Sense, there were 5,200 earmarks in that Senate bill, which averages out to twelve projects for every House member and fifty for every senator.43

  The Party of Government exploited the crisis of 2008–2009 to grow the government. Between the passage of Obama’s stimulus bill in 2009 and September 2010, millions of private sector jobs disappeared but 416,000 new government jobs were created.44 “Although 85 percent of Americans work for private employers, the administration’s own Recovery Act database reveals that four of every five jobs ‘created or saved’ were in government.”45 As a matter of political self-interest this made sense, for the vast majority of bureaucrats vote Democratic as do the vast majority of beneficiaries of government programs. The same week the Post editorial ran, Dennis Cauchon’s lead story on page one of USA Today reported:

  Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession’s first 18 months—and that is before overtime pay and bonuses are counted.

  Federal workers are enjoying an extraordinary boom time—in pay and hiring—during a recession that has cost 7.3 million jobs in the private sector.46

  When the recession began, the Department of Defense had 1,868 civilian employees earning $150,000. By December 2009, Defense had 10,100 employees earning $150,000 or more. When the recession began, the Department of Transportation had one person earning $170,000. By 2010, Transportation had 1,690 employees earning above $170,000.47

  Between 2005 and 2010, the number of federal workers earning more than $150,000 soared tenfold, and it doubled in the first two years of the Obama administration, during “the worst recession since the Great Depression.”48

  The three congressional districts north and west of the District of Columbia, Maryland’s Eighth, and Virginia’s Eleventh and Eighth, are among the ten most affluent congressional districts in America. And of the ten m
ajor metropolitan areas in the nation, the D.C. metro area ranks first in per capita income.49

  The financial crisis was the work of Washington and Wall Street, but Washington never saw better days. As USA Today reported in August 2010, in the first decade of the twenty-first century U.S. government workers left their fellow Americans in the dust.

  Federal workers have been awarded bigger average pay and benefit increases than private employees for nine years in a row. The compensation gap between federal and private workers has doubled in the past decade.

  Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation.… The federal compensation advantage has grown from $30,415 in 2000 to $61,998 last year.50

  Remarkable. U.S. government workers, who enjoy the greatest job security of any Americans, receive twice as much in annual pay and benefits as the average American. This is not the D.C. some of us grew up in.

  Is this the kind of government our fathers envisioned, or the kind of government they took up arms to overthrow?

  After his “shellacking” in 2010, Obama, reacting to public rage over federal pay, proposed a two-year freeze. But as USA Today reported, this freeze involved the use of smoke and mirrors. Across-the-board pay hikes would be frozen, but “many federal workers will receive other pay hikes—longevity increases (called steps), promotions in grade, bonuses, overtime and other cash payments”:

  Most federal employees are ranked at a general schedule (GS) grade from 1 to 15, and each grade has 10 steps within it. Step raises are largely automatic, based on longevity, but merit can hasten a step pay raise or even move a worker up multiple steps. Not every worker gets a step raise every year, but the raises average about 2% per year for workers as a group.51