Thursday, December 27, 2012

America's Crisis of Big Government Cronyism and Corruption

The January/February issue of Foreign Affairs is now available online. I just finished reading Fareed Zakaria's marquee essay, "Can America Be Fixed? The New Crisis of Democracy." While I disagree little on the problems we face, I differ substantially on the remedies he identifies. (And my respect for the man has plummeted over the years amid his increasingly predictable progressive sensibilities, but especially of late because of the allegations against him this year of plagiarism, for which he acknowledged and apologized for publicly, with permanent damage to his reputation.)

The article is gated but a quick summary and block quotes are sufficient for the purposes here. Zakaria sees the fiscal cliff stalemate as a signal of our political immobility. The gridlock we're facing means that the political establishment once again is delaying needed reforms on some of the biggest problems facing the country, most notably for Zakaria infrastructure and entitlements. The fatal flaw of the piece is that Zakaria's a hopeless advocate for expanding the size and scope of government. He actually offers an excellent discussion of the entitlement problem, but he refuses to see any role for markets and for the possibility of scaling back government commitments. His biggest problem is on infrastructure. Again, while he puts his finger on the problem quite deftly, he ignores some facts that make his case problematic --- one of the biggest being the fact that the U.S. spent nearly $1 trillion in "infrastructure" and "investment" in the Obama administration's 2009 stimulus legislation, and the country has virtually nothing to show for it in terms of long-term economic growth. Indeed, the administration's stimulus was a crony capitalist boondoggle that will likely be repeated again and again if the so-called investments Zakaria proposes are to indeed become public policy. In any case, some key block quotes. Here's a bit on the problems identified in the paper:

Foreign Affairs
As the United States continues its slow but steady recovery from the depths of the financial crisis, nobody actually wants a massive austerity package to shock the economy back into recession, and so the odds have always been high that the game of budgetary chicken will stop short of disaster. Looming past the cliff, however, is a deep chasm that poses a much greater challenge -- the retooling of the country's economy, society, and government necessary for the United States to perform effectively in the twenty-first century. The focus in Washington now is on taxing and cutting; it should be on reforming and investing. The United States needs serious change in its fiscal, entitlement, infrastructure, immigration, and education policies, among others. And yet a polarized and often paralyzed Washington has pushed dealing with these problems off into the future, which will only make them more difficult and expensive to solve....

Is there a new crisis of democracy? Certainly, the American public seems to think so. Anger with politicians and institutions of government is much greater than it was in 1975. According to American National Election Studies polls, in 1964, 76 percent of Americans agreed with the statement "You can trust the government in Washington to do what is right just about always or most of the time." By the late 1970s, that number had dropped to the high 40s. In 2008, it was 30 percent. In January 2010, it had fallen to 19 percent.

Commentators are prone to seeing the challenges of the moment in unnecessarily apocalyptic terms. It is possible that these problems, too, will pass, that the West will muddle through somehow until it faces yet another set of challenges a generation down the road, which will again be described in an overly dramatic fashion. But it is also possible that the public is onto something. The crisis of democracy, from this perspective, never really went away; it was just papered over with temporary solutions and obscured by a series of lucky breaks. Today, the problems have mounted, and yet American democracy is more dysfunctional and commands less authority than ever -- and it has fewer levers to pull in a globalized economy. This time, the pessimists might be right.
And here's the key bit on "infrastructure investment":
If the case for reform is important, the case for investment is more urgent. In its annual study of competitiveness, the World Economic Forum consistently gives the United States poor marks for its tax and regulatory policies, ranking it 76th in 2012, for example, on the "burden of government regulations." But for all its complications, the American economy remains one of the world's most competitive, ranking seventh overall -- only a modest slippage from five years ago. In contrast, the United States has dropped dramatically in its investments in human and physical capital. The WEF ranked American infrastructure fifth in the world a decade ago but now ranks it 25th and falling. The country used to lead the world in percentage of college graduates; it is now ranked 14th. U.S. federal funding for research and development as a percentage of GDP has fallen to half the level it was in 1960 -- while it is rising in countries such as China, Singapore, and South Korea. The public university system in the United States -- once the crown jewel of American public education -- is being gutted by budget cuts.

The modern history of the United States suggests a correlation between investment and growth. In the 1950s and 1960s, the federal government spent over five percent of GDP annually on investment, and the economy boomed. Over the last 30 years, the government has been cutting back; federal spending on investment is now around three percent of GDP annually, and growth has been tepid. As the Nobel Prize-winning economist Michael Spence has noted, the United States escaped from the Great Depression not only by spending massively on World War II but also by slashing consumption and ramping up investment. Americans reduced their spending, increased their savings, and purchased war bonds. That boost in public and private investment led to a generation of postwar growth. Another generation of growth will require comparable investments.

The problems of reform and investment come together in the case of infrastructure. In 2009, the American Society of Civil Engineers gave the country's infrastructure a grade of D and calculated that repairing and renovating it would cost $2 trillion. The specific number might be an exaggeration (engineers have a vested interest in the subject), but every study shows what any traveler can plainly see: the United States is falling badly behind. This is partly a matter of crumbling bridges and highways, but it goes well beyond that. The U.S. air traffic control system is outdated and in need of a $25 billion upgrade. The U.S. energy grid is antique, and it malfunctions often enough that many households are acquiring that classic symbol of status in the developing world: a private electrical generator. The country's drinking water is carried through a network of old and leaky pipes, and its cellular and broadband systems are slow compared with those of many other advanced countries. All this translates into slower growth. And if it takes longer to fix, it will cost more, as deferred maintenance usually does.

Spending on infrastructure is hardly a panacea, however, because without careful planning and oversight, it can be inefficient and ineffective. Congress allocates money to infrastructure projects based on politics, not need or bang for the buck. The elegant solution to the problem would be to have a national infrastructure bank that is funded by a combination of government money and private capital. Such a bank would minimize waste and redundancy by having projects chosen by technocrats on merit rather than by politicians for pork. Naturally, this very idea is languishing in Congress, despite some support from prominent figures on both sides of the aisle.

The same is the case with financial reforms: the problem is not a lack of good ideas or technical feasibility but politics. The politicians who sit on the committees overseeing the current alphabet soup of ineffective agencies are happy primarily because they can raise money for their campaigns from the financial industry. The current system works better as a mechanism for campaign fundraising than it does as an instrument for financial oversight.

In 1979, the social scientist Ezra Vogel published a book titled Japan as Number One, predicting a rosy future for the then-rising Asian power. When The Washington Post asked him recently why his prediction had been so far off the mark, he pointed out that the Japanese economy was highly sophisticated and advanced, but, he confessed, he had never anticipated that its political system would seize up the way it did and allow the country to spiral downward.

Vogel was right to note that the problem was politics rather than economics. All the advanced industrial economies have weaknesses, but they also all have considerable strengths, particularly the United States. They have reached a stage of development, however, at which outmoded policies, structures, and practices have to be changed or abandoned. The problem, as the economist Mancur Olson pointed out, is that the existing policies benefit interest groups that zealously protect the status quo. Reform requires governments to assert the national interest over such parochial interests, something that is increasingly difficult to do in a democracy.
Every now and then we see a new story on some collapsed bridge tragedy or massive urban flooding from busted water mains or broken levees, and on cue progressives start wagging their fingers about how we've got to start spending on infrastructure. I don't research this area but my regular reading on the politics of the stimulus isn't very reassuring. The administration's push for "investments" was mostly about the Democrat politics of job creation, and that didn't turn out so well. Conn Carroll has a good example, "$787 Billion in Stimulus, Zero Jobs “Created or Saved”." And while Zakaria's obsessed with government spending as "investmnent," there's little in the record of the last couple years that recommends doubling-down on it. See Romina Boccia, "New Stimulus Plan Same as the Old: Spend, Spend, Spend." And notice while Zakaria minimizes the corruption inherent in "infrastructure" spending as possibly "inefficient and ineffective," the facts of the past few years are devastating to his case. See Veronique de Rugy, "Stimulus Cronyism." And Michelle Malkin, "Obama's $50 Billion Union Infrastructure Boondoggle."

The United States is not some developing country that's going to be eviscerated by "draconian" spending cuts or devastated by some horrible "austerity package" that leaves the poor to fend for themselves. That's Krugmanite scare-mongering. We need to unleash the natural dynamism of the American economy. To put it as plainly as possible: We need robust and sustained economic growth, in the 4 or 5 percent range. We need to increase incentives for private investment. We need to reduce regulations and taxes on business job creators. And we need to rely on the system of federalism to shift real infrastructure investment from the federal to state governments. This isn't rocket science. The solutions to America's economic problems are self-evident. And the political crisis is largely one of a dramatically changed American electoral and political demographic. As the population base of the Democrat Party comes to increasingly favor policies of dependency, the productive, working sectors of the economy are required to bear a heavier load to keep everything afloat. Tea party Republicans, bless them, are resisting higher taxes because they know that'll be more of the same. As noted here yesterday, President Obama's not interested in fixing our politics or avoiding a recession should we go over the fiscal cliff. He's obsessed with punishing the most productive members of society in furtherance of his class warfare agenda of reducing inequality and promoting social justice. As long as we have one party that is objectively uninterested in growing the economy to create a rising tide that lifts all boats we will continue to have a crisis of political immobility. The electorate can fix the problem by choosing a government not fatally infected with cronyism and corruption. Both parties are implicated, although getting the Democrats out of power is the first order of business. We need to restore our faith in liberty and markets and unleash the innate innovation and dynamism of the individual. Our crisis is one of big government. Obama hasn't even been sworn in for a second term and its already clear that the public was duped in November. We must keep on with the hard work of real reform, which is what the tea party has represented, smaller government and fiscal responsibility. Without that we'll continue to stagnate and ultimately perish like the beached whale on the sand at Barbra Streisand's oceanfront estate.

BONUS: Zakaria dismisses the late Samuel Huntington's work in this report from the '70s-era Trilateral Commission: "The Crisis of Democracy." But our prospects for reform would be immeasurably greater if had more voices like Huntington's a less of those like Zakaria's.

ADDED: Linked at Blazing Cat Fur and Lonely Conservative. Thanks!