Robert Kuttner: The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity (2007, Knopf)

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(p. 6):

The failure of politics to seriously engage national problems goes hand in hand with the disrepair of democracy itself. For the first time in more than a century, the national government in the Bush era has spent more effort on suppressing voting than on expanding it. Serious people have good reason to believe that one or both of the last two presidential elections were stolen. Political participation is declining, as money crowds our civic engagement.

When politics does not deliver for people, the people give up on politics. Or they see politics as a realm mainly for cultural warfare, for battles over patriotism, or as something for other people. People internalize economic reversals. Pocketbook troubles seem to be private failures rather than the consequence of political choices. The very citizens most exposed to the most severe economic stress have been deserting politics at the most accelerating rate.

This disconnection of the people from their politics, in turn, leaves democracy far less energized. Consequently, when an autocratic administration ignores rights and laws, invents extraconstitutional doctrines such as presidential "signing statements," uses a state of permanent warfare to undermine free debate, or colludes in the suppression of the fundamental right to vote and to have every vote counted, there is far too little popular outcry. This is a recipe for losing both a tolerably just society and our democracy.

(p. 8):

Elites have not always been heedless of the common good. The American Republic was invented by a planter class that nonetheless believed deeply in democratic values and wanted to improve daily life for the common citizen. Many Americans of financial means were among the leaders of the abolitionist movement. In the Progressive Era, the robber barons who wanted to seize as much as possible for themselves were balanced by patrician reformers who cared about the well-being of the collectivity. Many reforms were the handiwork of the latter. Franklin D. Roosevelt, famously, was a class traitor, as were many of his New Deal colleagues. As recently as the Nixon era, there were influential progressive Republicans who supported universal health insurance, strict environmental regulation, and even a guaranteed annual income. Republicans were the stewards of fiscal responsibility. Today, it is hard to find a patrician who cares more about the republic than his own tax breaks and stock options.

(p. 11):

Politically and ideologically, the regulatory revolution of the 1930s and 1940s was possible because the usually dominant business elite was enfeebled (temporarily, as it turned out) by the practical failure of laissez-faire. Government enjoyed rare prestige in a normally libertarian country, because the federal government, under Franklin Roosevelt and Harry Truman, put people back to work, rescued capitalism from itself, then mobilized public resources to win a total-commitment war, and also underwrote new benefits, such as Social Security, unemployment compensation,the G.I. Bill of Rights, and Federal Housing Administration (FHA) loans, which allowed the Depression generation to graduate into the postwar middle class. The enterprise of managed capitalism was a practical success. Though few ordinary Americans understood this success as the achievement of a managed form of capitalism,much less knew the term, the idea was firmly implanted in the popular culture as a broadly shared premise about how the economy is supposed to work.

(p. 20):

In September 2005, Robert Gordon, an eminent and mainstream economist at Northwestern University, and his colleague Ian Dew-Becker presented a scholarly paper at the Brookings Institution entitled "Where Did the Productivity Growth Go?" They found, studying Census Bureau and Bureau of Labor Statistics data, that during the entire period 1966-2001, "Only the top ten percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth." Just one American in ten captured the lion's share of society's productivity growth -- for three decades. And even this understates what actually occurred. It was the top one tenth of 1 percent that gained the very most. Those between the 80th and 90th percentiles about held their own. Those between the 95th and 99th percentiles gained 29 percent, those from 99 to 99.9 gained 73 percent, and the top one tenth of 1 percent of the population -- one American in a thousand -- gained a staggering 291 percent. By 2004, more income went to the top 1 percent than to the entire bottom 50 percent.

(pp. 20-21):

The Economic Policy Institute reported that in 1979, the top 1 percent had 9.3 percent of all income. By 2000, this share had almost doubled, to 17.8 percent. Were it not for the fact that the average family was working at least 500 more hours a year in 2000 than in 1970, mainly because of women's mass entry into the paid labor force, incomes for the vast middle would have fallen even farther behind. This increase in the work hours required to make ends meet, and the concomitant reduction in leisure and in time for child rearing, is also a real decline in living standards that doesn't show up in the household income statistics.

(p. 27):

For example, economists calculate that helping young adults to get on the home ownership ladder earlier in their lives offers a very substantial economic boost. They begin accumulating equity sooner, they realize tax benefits, and they are spared from having to pay exorbitant and rising shares of their incomes for rent as they have children and need more space. They are likely to acquire better first homes and build wealth earlier in life -- and for most Americans, the equity in their homes is their principal form of net worth. As housing prices have outstripped income, delaying first-time home ownership also increases the entry cost.

(p. 32):

In truth, the ideal of an Ownership Society in America is more than two hundred years old, and it has entailed the affirmative use of government mainly to help ordinary people -- exactly the opposite of the radical individualism plus tax incentives commended by the Right. America has a high rate of home ownership because Thomas Jefferson was committed to land tenure policies that favored small freeholders; Lincoln gave us the Homestead Acts, which allowed people without financial wealth to become farmer-owners; Roosevelt's administration invented the federally insured self-amortizing mortgage; and Truman's offered even cheaper mortgages via the G.I. Bill of Rights. We are a well-educated nation because we were the first to have free, tax-supported public schools, and government began subsidizing broad-based higher education with land-grant colleges beginning in 1862. We have enjoyed secure retirement because of a blend of Social Security and tax-favored private pensions. In every case, government serves the goal of individual self-reliance and achievement. In no case is the risk piled solely onto the individual. The Right has sought to appropriate this legacy, but its policies would actually reverse it.

(p. 35):

The two generations that reached retirement age after 1955 benefited not just from more reliable private pensions. Social Security payouts as a share of lifetime income steadily increased until the early 1980s. Real incomes rose, making it easier to save. And there was a one-time windfall in the rising value of owner-occupied housing. Every one of these supports is going into reverse. A 2006 study by Munnell and Sundén on retirement insecurity calculates the combined effect of all these factors in income adequacy for the elderly. They find that 35 percent of "early boomers," those born between 1946 and 1954, will be at serious risk of not having enough income when they begin retiring late in this decade. For "late boomers," born between 1955 and 1964, the proportion at risk rises to 44 percent. And for "Generation X," born between 1965 and 1972, the number is 49 percent. Of course, it is lower-income people who fave the greatest risk, while those who inherit substantial sums from affluent parents, whatever their own lifetime earnings and savings habits, face little risk at all.

(pp. 44-45):

As government has largely ceased to offset the instability of markets, ordinary voters have given up on government making much of a difference in their lives. The ideology of deregulation has become dominant in both political parties. Republicans have been so successful at two rounds of tax cutting and deficit deepening (in the eras of Reagan and Bush I, and then again under Bush II) that many Democrats now see their main task as balancing the budget rather than restoring economic opportunity. This has the handy side effect of neutering the Democrats politically. Budget balancing is not exactly a clarion call to economically frustrated citizens, so the potential alliance between Democrats and alienated voters is never consummated. In addition, since Jimmy Carter's presidency, many Democrats have colluded in the Republican project of government bashing. Even when they don't openly disparage government, most Democrats are unfriendly to economic regulation.

(pp. 47-48):

None of this pulling away at the top and widened inequality is the result of "the market," as if markets were spontaneous creations of nature. All functioning markets are creatures of laws, beginning with laws defining and protecting basic property rights, laws creating and privileging corporations as legal "persons," and laws defining the right of shareholders and duties of corporate boards. Laws can lead to a narrower or broader diffusion and an economy's benefits. In the past three decades, because of the capture of the political process by economic elites, the movement in the evolution of laws governing capitalism has been entirely in one direction -- toward a legal conception of markets that narrows rather than broadens concentrations of wealth.

(pp. 60-61):

Plenty of innovation will still occur. Back in the era of a more equal America, entrepreneurs innovated even though their financial returns were only in the tens of millions rather than the billions. And some, like Jonas Salk, or Tim Berners-Lee, who created the World Wide Web, did it for the sheer joy of making a better world and settled for a decent professional income. Indeed, the whole culture of windfall gain is at risk of crowding out the necessary public-mindedness of scientists, doctors, and educators, most of whom would happily take a congenial work environment and a good professional salary, but whose peer culture is signaling them that they are suckers unless they go for astronomical incomes. This trend is corrupting the values of fields like scientific research.

(pp. 68-69):

For every genuine entrepreneur who invents something truly new and who arguably "deserves" annual income in the tens or hundreds of millions, there are countless routine corporate CEOs tending mature companies who have increased their typical earnings tenfold sine the 1980s without adding anything like that multiple to the corporation's wealth creation. They are simply taking a free ride on the shifting norms of what CEOs are paid, norms that are largely the fruits o the winner-take-all psychology promoted by deregulation. Every year, the financial press reports on innumerable CEOs whose pay rose while the company's earnings fell.

(pp. 73-74):

In their essence, the Wall Street scandals of the 1990s were about conflicts of interest -- invited by deregulation and abused by insiders to their own financial advantage. In almost every case, the speculations involved borrowed money, often deliberately concealed and thus exponentially increasing the risk of loss in the event of a sudden downturn, miscalculation, or exposure of fraud. Far from enhancing economic efficiency -- always the rationale for giving financial markets and their speculators more license -- deregulation promoted insiders' enrichment at the expense of small investors, ordinary employees, and pensioners and jeopardized the efficiency and solvency of the system as a whole.

(pp. 74-75):

In the 1980s and 1990s, however, every element of agency failed. Deregulation and lax enforcement of the regulations that remained eroded professional norms that had constrained rank opportunism. Supposedly independent auditors colluded with management to dress up corporate books. Ostensibly fair-minded securities analysts serving investors turned out to be stock touts looking to bring their firm underwriting business based on their success in running up a client company's share price. Boards of directors that allegedly represented shareholders helped crony CEOs reap astronomical compensation packages largely disconnected from actual company performance. Corporate boards promoted stock options that gave executives incentives not to optimize true performance but to inflate the share price in the short run. Mutual funds, rather than serving as the agents of investors, took huge transaction fees and invariably voted their shares with management. Brokers and investment bankers helped themselves and their favorite clients to new stock issues (IPOs) at preferential prices not available to the public. Institutions of self-regulation, such as the National Association of Securities Dealers, the American Institute of Certified Public Accountants, and the New York Stock Exchange, went after minor infractions but not the deeper corruption.

(p. 96):

The oil shock of 1973 and higher inflation created an opening for financial deregulation in several ways. The fixed exchange rates that had anchored the global trading system failed to hold. With U.S. inflation rising and foreigners clamoring to exchange dollars for gold, President Richard Nixon abruptly delinked the dollar from gold and shifted to a regime of floating exchange rates. Floating rates, whose values were set daily by trading markets, quickly offered a whole new set of opportunities to speculate in currencies, often destabilizing entire economies. Inflation also played havoc with the regulation of the interest that federally insured banks and thrift institutions could pay on savings and checking accounts. The regulatory premise was that if banks got into the game of bidding for deposits, as they had done in the 1920s, they would then need to earn higher rates of return and might take unacceptable risks with depositors' money (which in fact they did, both then and now).

(pp. 112-113):

In an era of derivatives, margin regulation has become a joke, something that restricts only the small and the unsophisticated. Banks collude in the circumvention of margin limits, and regulators collude in the banks' behavior. Hedge funds borrow their money from the largest money center banks, often at preferential rates because they are such large borrowers. The transactions are presumably safe, because many trades in derivatives are settled daily, although some hedge funds have bargained for, and received, long-term lines of credit. In ordinary transactions, banks are owed the money to settle a hedge fund market play. But in another major hedge fund collapse, there would be no market for these derivatives, the hedge fund would quickly run out of money to pay off the banks, and liquidity would dry up. Moreover, with the merger and consolidation of major lending institutions into a handful of trillion-dollar behemoths, a great many hedge funds are making essentially the same bets, financed by the same banks.

(pp. 120-121):

Burger King was taken private in 2002. In February 2006, it was taken public again. The private owners, a consortium of the Texas Pacific Group and Bain Capital, more than tripled their stake in less than four years. Burger king is roughly as profitable today as it was in 2002, though its market share has continued to fall. Is it really possible to triple the efficiency of a commodity business such as selling fast food? Or were these private-equity firms cooking the books along with the burgers? Barring a lawsuit charging outright fraud (which is far more difficult today, thanks to the legislation passed by the Republican Congress in 1996), we'll never know, since once a company is taken private it enters a regulatory black hole.

Private-equity funds promote these deals not just for the opportunity to make a quick killing on the acquisition and resale. There are also lucrative fees to be had. For instance, in the Burger King buyout from a British-owned chain, the two private investment firms collected an initial $22.4 million in unspecified fees. Burger King then began paying its new owners quarterly management fees for monitoring its business and serving on its board. In 2006, these fees added up to $29 million. And just before the new public offering, the owners voted themselves a handsome $367 million dividend. Finally, the two private investment firms collected a $30 million "termination fee" from the company for selling it off.

One of the owners who flipped Burger King for a quick profit, Bain Capital, is a well-established private investment firm cofounded by former Massachusetts governor Mitt Romney. In 2005, it tried to buy the entire National Hockey League. The other owner, Texas Pacific Group, works closely with Goldman Sachs. With private-equity firms proliferating, the big, established Wall Street houses are not about to let independent operators make off with this lucrative business. Goldman has so many fingers in so many pies that it can make money on fees, commissions, underwriting, lending, and in this case as an owner/speculator. When Burger King started selling shares to the public again, Goldman reaped another $6.3 million in underwriting fees. The two private-equity firms ended up tripling their original investment, yet, after selling some shares to the public, still retained a 76 percent stake. What, exactly, did the new owners contribute?

(p. 124):

As evidence, Pearlstein got hold of a memo from another private-equity pioneer, Bill Conway, a founder of the Carlyle Group. Conway warned: "Frankly, there is so much liquidity in the world that lenders (even 'our' lenders) are making very risky credit decisions. . . . I know the longer it lasts the more money our investors (and we) will make. . . . And I know that the longer it lasts, the worse it will be when it ends." Pearlstein and other commentators pointed to the huge potential for conflicts of interest between the general and limited partners of Blackstone and their public shareholders. "[W]hen the market finally turns and deals blow up," Pearlstein warned, "you can be pretty sure that fund managers will do everything they can to protect themselves and the interests of their limited partners and let the saps who are public shareholders take it on the chin."

(p. 136):

If public policy makers wish to help more low-income Americans become home owners, there is a far better approach than relying on sleazy mortgage brokers peddling bait-and-switch products that leave a trail of foreclosure and heartbreak. At other times in our history, the government has offered subsidized mortgages to first-time home buyers through the VA and FHA. The 3 percent down payment loans offered through FHA have a far lower default rate than those of subprime lenders. Government-backed nonprofits such as Neighborhood Housing Services of America are not in the mortgage business for a quick buck but to counsel low-income home buyers and to work with them for the long haul. Neighborhood Housing Service's foreclosure rate is close to zero.

(pp. 170-171):

Today there is a deficit problem once again, because of the huge holes blown in the tax code by several rounds of tax cuts. Vice President Dick Cheney said out loud in 2002 what as lot of Republican politicians privately believed: "Deficits don't matter." The public outcry of 1992 had come and gone. Republicans and the business elite seemed to care about deficits when they could be blamed on Democratic "tax and spend" but not when they resulted from Republican tax cuts. Grover Norquist, the Republican tax-cut strategist, articulated the real game: "Starve the beast." The real point of the tax cuts was to create an endless cycle of deficit crises whose cure would be more cuts in spending.

Precious few Republicans put fiscal balance ahead of tax cutting. That left the Democrats as the paladins of deficit reduction. In July 2006, the Democratic House leader and later Speaker, Nancy Pelosi, solemnly pledged that every penny of money gleaned from any reduction in the Bush tax cuts would go for deficit reduction, not new social outlay. This deficit-hawk role is not only thankless but self-defeating. As a matter of politics, Cheney is right. After seeing the deficit wolf banished in the 1990s, most voters don't care much about deficits in the 2000s. But by sticking Democrats with the green-eyeshade role, Republicans astutely deprive Democrats of pocketbook themes that might actually rally voters. And as a matter of economics, Stiglitz is right: too much deficit reduction is as bad for the economy as too little.

(p. 200):

In the United States, median-income workers in 2006 paid a much higher combined rate in payroll taxes, income taxes, and sales taxes than they did in 1966, even though total public outlay relative to GDP was almost identical. In the 1960s, corporate tax receipts produced 16.1 percent of all federal revenue. Though corporate profits are a higher fraction of GDP than ever, corporate tax revenues fell to 9.4 percent in the 1990s and around 7 percent of federal tax receipts today. The same pattern has occurred in nearly every OECD member country.

A related effect of globalization is a huge increase in the opportunities for semilegal tax avoidance as well as criminal tax evasion, both abetted by conservative governments that are happy to see corporations escape taxation one way or another. Arguably legal tax avoidance schemes have become so complex in recent years that national tax authorities mostly throw up their hands. Even mainstream corporate tax planning, using global accounting maneuvers, costs national treasuries several hundreds of billions of dollars each year. Meanwhile, the auditing resources of the IRS have been shifted from corporations and the complex tax avoidance partnerships used by the wealthy to investigations of the modest earned income tax credit available to the working poor.

A multinational corporation with operations in several countries can arrange its internal bookeeping to minimize taxes owed. Within limits, this tactic, known as transfer pricing, is legal. It is the reason that the tax counsels of large corporations can earn seven-figure salaries for saving their companies nine-and ten-figure tax bills.

(pp. 202-203):

In principle, it would not be difficult for the advanced countries to put tax havens out of business. The major trading nations would simply enact reciprocal national laws, requiring any bank, corporation, partnership, or individual doing business both in the treaty country and with a bank or corporation located in a tax haven to report to domestic tax authorities all financial transactions using the tax haven. Alternatively, the major nations could flatly prohibit commerce with countries that refused to sign tax enforcement treaties. What prevents governments from doing this is of course the political power of organized business.

(pp. 219-220):

Instead, American leaders beginning with Alexander Hamilton thought it was smarter for the nation to pursue advantage in industry as well as agriculture. So the United States industrialized behind high tariff walls. Not only did we have tariffs, but we used what today would be called an industrial policy. The railroads were given land grants equal to 8 percent of the surface area of the United States -- land that they could rent or sell to finance construction. It was a pure government subsidy of an emerging industry. Beginning in 1862, the government invested in public universities to promote the mechanical arts and in agricultural extension to foster technical advances in farming. World War II and the Cold War functioned as immense, if tacit, technology policies.

Every other emergent nation reached similar conclusions. Each practiced its own variations on economic nationalism, many with far more direct government involvement in the industrial economy than in the United States and far more nakedly protectionist policies. France and Germany, and later Japan, Korea, Brazil, India, and China, all developed their industries pursuing diverse forms of what economists today call strategic trade, or neomercantilism.

The appeal of acquiring industry is not hard to discern. Even if a nation has plenty of raw materials, extractive industries tend to be economically static. Many economists have commented on the paradox of mineral-rich nations being mired in poverty. In practice, mineral wealth is often exploited by foreign corporations, and of course the materials eventually run out. Even agriculture, though more technically dynamic, is less so than industry and is dependent on fluctuations of world commodity prices.

Manufacturing allows nations to begin with fairly simple production and move quickly up the ladder. There are multiple linkages among manufacturing, technology, education, workers' skills, high-productivity jobs, and national wealth. Though the theory of comparative advantage counsels that nations should maximize their well-being simply by importing such products from the most efficient current exporter, the leaders of most developing nations are more astute than the standard economic model. It makes sense to use government policies to capture leadership in dynamic sectors of the economy.

(pp. 227-228):

Though some East Asian nations became more marketlike in some respects, such as having somewhat open consumer economies, in their production systems they continued to use various forms of state assistance and state-guided development strategies combined with high domestic savings rates, and they became export powerhouses. With the United States as the only major nation whose government did not care where production was located, the American economy became the residual recipient for the exports of these rapidly growing economies. Our manufacturing economy suffered, and our trade deficit became permanent and structural. India's fast-growing economy, for example, sends about 65 percent of its exports to the United States and only 3 percent to Japan. With Japan having roughly half the GDP of the United States, its share of India's exports should be about ten times as large as it currently is.

(p. 229):

Because the United States' trade policy lacks a strategic focus, its response to foreign challenges has been episodic and inconsistent. The consequence is that vital industries and technologies developed in the United States are losing market share, leaving it with a structural trade imbalance. It is this reality of other nations' practicing strategic trade -- not the low U.S. domestic savings rate or the federal budget deficit -- that explains most of the wide and growing trade gap, which will soon top one trillion dollars. Even more significant than the size of the trade deficit is the percentage of imbalance. Our imports are fully 57 percent higher than our exports, and that ratio is growing. The U.S. trade imbalance increased by 17.5 percent in 2005 alone. In 2005, our negative trade balance with China was $201 billion. That imbalance was the result of $243 billion in imports and just $42 billion in exports. For Japan, the figures were $138 billion in imports and $55 billion in exports. As other nations capture advantage in technology-intensive products, we are increasingly importing the most advanced products and exporting raw materials, or we are exporting materials for assembly and reimport. Given the truculence with which the U.S. government advances its perceived national interest in military and geostrategic areas, it seems almost bizarre that we should be so weak when it comes to advancing our trade interests.

(p. 230):

According to an authoritative review by Owen Herrnstadt of the cost of offsets, between 1993 and 2005, U.S. companies reported 8,007 offset transactions in 45 countries. The monetary value of these transactions totaled $37.3 billion. Nearly all of this represented manufacturing production that could have been done in the United States, improving our trade balance, providing good jobs for U.S. workers, and keeping American industry at the forefront of production technology. Instead, because Washington places military goals ahead of economic ones, this economic activity went overseas. Boeing, for example, has a $4.4 billion contract to provide forty F-15 fighters to South Korea. The South Koreans (who enjoy a lopsided trade surplus with the United States) negotiated a deal to have most of the parts made locally, creating high-wage jobs that otherwise would have stayed in the United States, improving our manufacturing base and balance of trade. The Koreans are also allowed to supply parts for F-15s that Boeing sells elsewhere. Sometimes the negotiated offsets are far removed from the immediate sale. After Poland joined NATO, Lockheed won a contract to supply $3.8 billion worth of F-16s. According to The New York Times, the offsets from Lockheed and its industrial partners, which Lockheed pays, include subcontracts for Poles to make commercial jet trainers as well as parts for business aircraft like the Gulfstream and Piper for export to the United States and to make the Pratt & Whitney engine for the F-16. There is also a venture with Accenture for a new technology company in Lodz and a partnership with the University of Texas to start a technology accelerator at the University of Lodz.

(pp. 245-246):

Though it is little appreciated today, global fiance built on principles of managed capitalism did not occur without a political fight. As the Roosevelt and Truman administrations promoted public institutions such as the IMF, World Bank, and Marshall Plan, the financial conservatives of that era argued that private financial flows would be ample to restart normal international commerce and to rebuilt war-torn Europe and Japan. Conservatives had made the same argument after World War I, with catastrophic results. They had added war reparations to the burden of Germany's economic recovery and created no transnational public institutions to temper the speculative, destabilizing, and ultimately deflationary influence of private capital flows. Their legacy was the Great Depression.

The difference between the 1920s, the 1940s, and our own era has nothing to do with economic fundamentals, which are unchanging. The main difference is in who had the political power to make these decisions. Of these three economic period, only in the 1940s did sponsors of managed capitalism prevail.

(p. 254):

Likewise, in the summer of 2006, oil prices soared. Hedge funds had become nervous about the Middle East summer gasoline demand slightly exceeded projections, and supply was tight. These speculative forces bid up the price of crude oil to unsustainable levels. As autumn came, and with it a supply glut, prices at the pump tumbled by more than a dollar. Political cynics imagined the Bush family calling their Saudi friends to increase supply or Dick Cheney getting on the phone to oil executives, asking them to lower retail prices in anticipation of the election. That may even have happened, but it didn't need to. The extreme swings in retail gas prices reflect how speculative hedge funds needlessly exaggerated economic, seasonal, and geopolitical factors.

(p. 259):

In recent years, the IMF has pulled back from its recipe of enforced austerity and mandatory financial market opening. Nothing fails like failure. After the East Asian collapse, many governments vowed never again to work with the IMF. The correlation between the developing nations that have followed the IMF recipe and those that have prospered is nearly a perfect refutation of the IMF's view of how economies work. In this decade, there has been a quiet financial revolution in South America, as Argentina and Brazil have paid off the last of their debts to the IMF, and most Latin American countries have just stopped doing business with the Fund, whose outstanding loans are now just a fraction of their peak.

(p. 260):

The net debt owed by the United States to foreigners rose to about $2.7 trillion in 2005, an increase of $333 billion over the previous year. In fact, the current account (mostly trade) deficit is much higher than that increase in the debt -- in 2005 it was $792 billion. The reason our total debt to foreigners did not increase by that full amount is that Americans also make investments overseas. Even with such investments, however, our net foreign indebtedness has been rising at a very rapid rate. Foreigners now hold almost 60 percent of all outstanding Treasury securities, up from 20 percent in the mid-1990s.

The excessive dependence of the U.S> economy on foreign borrowing increases the risk of a domestic depression and even a global one. The problem is not the national debt but the reliance on foreign creditors. The foreign debt, in turn, reflects the structural trade deficit. We have been borrowing our prosperity for better than two decades, and the ratio of foreign borrowing to GDP is growing. The longer an adjustment is deferred, the more serious will be the collapse.

(pp. 261-262):

A real decline in American living standards has already been baked into the national cake. It has simply been disguised, for now, by the borrowing from abroad, which must eventually be paid -- in ever-higher interest payments, the sell-off of U.S. assets that generate income, or an eventual dollar crash. About half of our foreign debt is held by foreign governments. However, the central banks of allied nations cannot keep this game going indefinitely, much as they might wish to help, because the other half of America's international creditors are still private. [ . . . ]

Eventually, a country that runs a chronic trade deficit must suffer a decline in the value of its currency. Most economists calculate that it would take a devaluation in the range of 30 percent to put America's trade deficit on a downward path. Some contend that a decline of 30 percent of the value of the dollar would not be bad. Imports would become more expensive, but that would be good for both domestic production and exports. Since virtually all of our foreign debt is denominated in dollars, a cheaper dollar would mean a write-off of that much debt. Paul Volcker points out that the dollar went through a period of overvaluation in the 1980s and declined by about 25 percent against major foreign currencies, and nothing terrible happened. However, that occurred during a period when the dollar was artificially high because of Volcker's own policies of very high interest rates and there was no overhang of foreign debt. As the Fed relented and allowed interest rates to come down, it was natural that the dollar should depreciate. Today, by contrast, dollar interest rates are low. The only reason the dollar is holding its value is that foreign central banks want it that way and manipulate their own currencies accordingly.

E.g., the dollar has declined well over 30% against the Euro and the UK Pound, but remains pegged to the Chinese Yuan, so the dollar has not gained any trade advantage against one of America's largest trading partners.

(p. 278):

Kerry, in 2004, wanted to show the Democratic base that he was on their side economically. But he also wished not to offend the economic elites. So the best he could manage was to call for arcane changes in the tax code, so that the tax system would not reward "Benedict Arnold CEOs" for moving jobs offshore. This pol-tested slogan sounded good, but few knew exactly what Kerry meant. The slogan did not bespeak any serious understanding of the trade problem or any commitment to fundamental change, nor did Kerry. Tax favoritism for offshoring jobs is perhaps a third-tier cause of job loss, if that. Nor did the slogan, in the end, resonate with voters. It was more weak tea.

(p. 280):

The politics of permanent deficits and the shift of taxes onto ordinary working people at a time of pocketbook distress has done just what Republicans hoped. It has largely depoliticized economic hardship. It has made voters resistant to any kind of taxation -- and Democrats averse to proposing even progressive tax reforms that would raise taxes only at the top and cut net taxes for most people. In the Bush era, Republicans who sponsored politics and programs opposed by substantial majorities of Americans invariably fell back on two trumps: "Democrats Won't Keep You Safe" and "Democrats Will Raise Your Taxes." Strip government of resources, put cronies in charge who are incompetent at running it, and people will stop seeing government as their ally. Even Democrats will think twice about defending government.

(pp. 294-295):

"To seniors in this country," Bush earnestly declared, "you earned your benefits, you made your plans, and President George W. Bush will keep the promise of Social Security -- no changes, no reductions, no way."

"Medicare," he added, "does more than meet the needs of our elderly; it reflects the values of our society. We will set it on firm financial ground, and make prescription drugs available and affordable for every senior who needs them."

In the third presidential debate, Bush told Gore, "You know I support a national patients' bill of rights, Mr. Vice President. And I want all people covered." He called for grants to the states "so that seniors -- poor seniors -- don't have to choose between food and medicine."

Bush pledged to change the tone in Washington, to govern as a bipartisan the way he had done as governor of Texas. "I know it's going to require a different kind of leader to go to Washington and say to both Republicans and Democrats, 'Let's come together,'" he said.

Bush repeatedly promised to balance the budget and insisted that the nation could afford a tax cut without slipping into deficit. He even criticized a House Republican plan to achieve budget savings by cutting the Earned Income Tax Credit. "I don't think they ought to balance their budget on the backs of the poor," he said.

All these declarations were, of course, lies. While all recent presidents have periodically gone back on promises and some have told explicit untruths, what's interesting is that the multiple untruths told by this president are something very rare in politics: ideological lies.

Hypocrisy, as La Rochefoucauld observed, is the homage that vice pays to virtue. In the case of Bush, campaign lies were the homage that Republican sloganeering paid to the popularity of progressive Democratic ideology.

Imagine instead that Bush had hit the campaign trail promoting a Social Security shift that would increase the system's deficits, requiring cuts in benefits and an increase in the retirement age; that he promised a tax cut that cost more than twice Social Security's long-term shortfall. Imagine that his patients' rights bill was advertised as authored by the HMO industry -- and as prohibiting patients denied care from suing their insurer; that he touted a Medicare drug plan written by the drug and insurance industries that left a $2,250 "doughnut hole" in annual coverage; that his environmental policy would scrap one protection after another and let industry rewrite the rules; that he pledged to demonize Democrats who resisted his policies; that his No Child Left Behind program pledged to freeze funding for Head Start and money for child care -- and to go back on a bipartisan deal to increase federal funds for poor public schools in exchange for high-stakes testing.

Campaigning on that set of views, Bush would have been the minority candidate of a minority party. There would have been no cliff-hanger in Florida and no narrow Supreme Court resolution of Bush v. Gore, Yet that set of views has been his actual program. And his need to prevaricate suggests the popularity of progressive economic themes.