Arrogance of Assumptions

Most political failures are born in assumptions. In fact most bad decisions generally start by folks assuming something that isn’t remotely correct. In the case of the current financial crisis, the litany of failed assumptions is staggering, but it is worthwhile to examine the big ones to see if in fact we have actually learned anything:

1. Debt and increasing methods of packaging debt to allow increased transactional flow, business funding, and higher real estate values are essential tools for growth. Heavier leveraging (read: less cash and more debt) produces stellar returns because debt always costs less than equity. The resulting accelerated growth will more than justify the risk.

2. You can fight expensive and limited value wars while reducing taxes, because the country is growing sufficiently rapidly to cover any possible devaluation due to excess borrowing to fund these military efforts instead of paying for them with higher taxes.

3. Reducing taxes increases jobs.

4. We can grow our way out of this recession.

The United States and most of Western Europe haven’t seen significant growth for more than a decade before the recession, particularly if you examine the impact of population increases on growth rates and factor that out. And obviously, once the recession hit, stalled “growth” and negative “growth” became the rule. Yet virtually all of the above assumptions require significant national economic growth to hold validity. Binyamin Appelbaum, writing for the August 6^th New York Times, summarized this confluence of expectations: “S.&P. said [August 5^th] that it was losing faith in America’s political leaders. Investors seem to be losing hope. The movements of markets are collective predictions of future prosperity, and the tidings are increasingly grim.

“‘Europe’s plan was to have growth fix the problem. America’s plan was to have growth fix the problem. And that’s not going to work,’ said Kenneth Rogoff, an economics professor at Harvard. ‘I think it’s really starting to sink in that we’re not anywhere near an endgame.’… The United States and Europe face parallel debt problems. Here, banks and investors are pitted against homeowners. There, banks and investors are pitted against nations. In both cases, governments have struggled to re-balance their books.”

Every one of the above assumptions was false. The Wall Street “debt is good” frenzy collapsed the economy, dramatically in the fall of 2008, based on highly leveraged borrowings against insufficient values. And not only have our Iraqi and Afghani military expeditions ended in failure – we ignored history and enter two theaters of war where we thought our military might would reduce decades of tribal hostilities that no outsider has ever overcome – but we actually had the hubris to fight those wars for over a decade with a lower tax rate than we had during prosperous peaceful time when we didn’t fund such military activities. Finally, no rational employer adds jobs based on tax rates, high or low; that is always going to be a function of perceived consumer demand.

China holds a trillion and a half of our national debt, and while they are secretly cheering wildly at our seeming fall because of such excess debt (they really couldn’t be happier… the new weapons of the 21^st century are just as much economic as they are military), they are voicing their official concern at our condition: “China, the largest foreign holder of United States debt, said Saturday that Washington needed to ‘cure its addiction to debts’ and ‘live within its means,’ just hours after the rating agency Standard & Poor’s downgraded America’s long-term debt.” NY Times, August 6^th.

Even after admitting that they had made a minor $2 trillion overestimation of the extent of our national debt, Standard & Poor’s not only reaffirmed their downgrade of America’s sovereign creditworthiness but indicated that further downgrades were likely. Doctrinaire intransigence based on false economic assumptions has brought the entire Western world to its knees. In the United States, it is fine to attack big government and that taxes only encourage such a reality – truth lies in those words – but the problem stems from attempting to adjust this problem retroactively, after we wages stupid, economy-killing wars, after the government grew to its present size. Simply put, we owe the money!

What the idiots in Washington don’t seem to grasp is that the world is asking us to pay for what we have already consumed… and also to adjust our spending habits going forward accordingly. It doesn’t matter that Republican Tea Party advocates don’t believe in increasing taxes, sooner or later taxes will rise… and the longer we wait, the higher that rise is going to have to be. It doesn’t matter that newly-appointed Democratic Secretary of Defense Leon Panetta thinks cutting our military budget further is bad for national security, because a tanked and falling economy is worse for national security, and we can no longer afford to be the world’s policeman or wage wars that bring us absolutely zero benefits. Afghanistan will fail as a governable entity whether we leave now or in twenty years. What’s even worse, without some government stimulus at the latest news, we’ve got nowhere to go but down. Catch 22, but here we are.

I’m Peter Dekom, and what we are experiencing today is a combination of governance by slogan, mythology, ignorance and arrogance.