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Our Failed National Economy

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It turns out there was no miracle of economic growth, productivity, and prosperity over the last several decades -- even if Wall Street stock peddlers and Republican orators still cling to that illusion.

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The upcoming campaign to stop the Republican budget committee from "destroying" Social Security will be wrapped in two simple but powerful messages: a) it's not broke according to the president's deficit commission, so don't fix it; and b) don't cut grandma's $2,000 monthly check in order to increase the after-tax income of millionaires by $2,000 per day. So ferocious will this campaign become that in a matter of months Congressman Ryan's platoon of supporters will -- unlike in the movie -- abandon him in a field of hostile fire. Indeed, much of the Republican caucus will likely be taking a supplemental pledge even before the first Congressional recess; namely, to oppose the "Ryan Plan" in any way, shape, or form.

Once you set aside Social Security and the related retirement entitlements and the social safety net, you have about $600 billion of entitlements for Medicare and veterans programs. Since veterans are integral to the Republican "base," there isn't a prayer of cuts in the latter. And as to the former, it only needs be recalled that the sick care cartel of hospitals, doctors, drug companies, and scooter chair manufacturers that own the Medicare program have been assiduously bipartisan in their dispensation of campaign cash. Indeed, the GOP has already shown its true colors on Medicare. During the first six years of the Bush administration when it controlled both houses of Congress, it made no structural reforms of Medicare whatsoever, and, instead, grafted on the Part D drug benefit -- the largest single new entitlement program since the 1960s.

None of these blatantly obvious realities are likely to impress the dramatically swollen ranks of House Republicans. They'll predictably work themselves into a frenzy of tax-increase denunciation and rhetorical tilting at windmills on the spending front. But where does that leave them on their pledge to reduce the deficit and shrink Big Government? The short answer is that it leaves them in for a rude awakening.

On the fringes of the 75-plus greenhorns who will populate the Republican caucus, there appears to be some sentiment in favor a modern version of Senator Robert Taft's sensible isolationism of an earlier era. At least some of the Tea Party crusaders appear to be saying, "enough of nation building and wars of occupation in the global backwaters." But wait until the neo-con thought police get done with "freshman orientation" at the Republican caucus meetings in December. The $800 billion that goes for national security and its step-child, homeland security, will be safe from assault -- at least from the anti-spending forces of the GOP.

The next rude awakening will be the old saw, "we have met the enemy and it is us." Republicans have been snorting loudly about runaway spending in the small $550 billion corner of the budget (13% of total outlays) called non-defense discretionary spending. The problem here is that about $125 billion of this was one-time spending contained in the Obama Administration's misguided "stimulus" program. While Republicans may earnestly desire to cut these programs to zero, they can't because under standard budgeting conventions most of these "emergency" funds aren't in the out-year budget baseline.

What is in the budget baseline is about $450 billion of spending for Head Start, the national park service, Amtrak, the national institutes of health, farm extension agents, and much more of like and similar motherhood. The inauspicious backdrop here is that when George W. Bush and the Republicans took power in January 2001, spending for non-defense discretionary programs were only $260 billion. So with nary a veto or government shutdown, the self-proclaimed anti-spending party managed to raise the budget by 60% during eight years of plenty. It might be questioned how likely they are to march back down the hill during the lean years now upon us.

In short, Tuesday night's results prove the Big Lie still sells. It's emboldened the GOP to an even more militant embrace of its destructive mantra of "no tax increase anytime, anywhere and for any reason." As the campaign cranks up, Washington will descend into a cauldron of partisan rancor. The Democratic remnant will counter with the most ferocious bloody-shirt campaign ever to "save" Social Security. Meanwhile, the Treasury will continue to issue new debt of $100 billion per month into an economy that cannot expand in nominal terms at more than a 3-4% rate or $50 billion per month.

So the real question from Tuesday night's outcome is how long can the US government issue its own increasingly toxic sovereign debt into the global market at a rate twice as fast as underlying economic growth? The cynic might say: as long as the Fed can continue to monetize 100% of the new debt issue, as it promised in Wednesday's $100 billion per month quantitative easing 2 (QE2) announcement. But it should be obvious to all except the insouciant boys and girls and robots of Wall Street that the world's leading central bank is now dispensing pure monetary heroin. And, ironically, that's likely to kill the patient before the fiscal question is even addressed.

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No positions in stocks mentioned.

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