BY GEORGE A. ROSS | OCTOBER 6, 2010
Government at its finest – how we got here
As the pundits prognosticate and the politicians scramble for re-election, we the people attempt to pay our bills as well as those of the federal, state and municipal governments. We should ask ourselves how we got here. It has been just over 70 years since the “Great Depression” and here we are back in a similar hole. It is similar in that during the “Great Depression” unemployment varied between 15 and 25 percent; the current real unemployment level is 18 percent. The difference between then and now is there were no safety nets during most of the “Great Depression” (unemployment insurance, food stamps, social security, Medicare and Medicaid to name a few) and the majority of households had only one bread winner. The politically correct call the current situation a “Great Recession.” Both happened because of greed (business, government, public) and misguided government policies; these are always the culprit.
During the 1930s there was legislation put into place which restricted the banking and financial institutions in the manner and scope of their business transactions. The Glass Steagall Act of 1933 and the Banking Act of 1935 provided some interesting restrictions. Glass Steagall prevented commercial banks from becoming financial investment institutions, established the FDIC, placed federal caps on TD (time deposit) interest rates and prohibited interest on DD’s (daily deposits) and finally, increased capital requirements on national banks. The Banking Act restricted pricing, geography, products and capital. During the 1970s, 80s and 90s Presidents Carter, Reagan, Bush (senior), Clinton and Congress made inroads to loosen and modify these restrictions. By 1999 most financial institutions were offering both saving and investment opportunities. Banks were merging into very large banks and were given forbearance based on assumptions they would be able to force a change in the law. It started in 1986 when Norwest merged with Wells Fargo and culminated in 1998 when Citibank merged with Travelers Insurance creating CitiGroup. Although these mergers violated the Bank Holding Act assumptions were made that there was a large legal change in the offing. Relaxations made in Glass Steagall over the years permitted commercial banks to pursue investment banking as well as providing stock and insurance brokerage opportunities. The Clinton administration made it known they would veto any legislation that would scale back minority lending requirements. The Community Reinvestment Act of 1977, which restricted redline loans, was not to be touched. Redlining loans had been wrongly used to reject loans to minorities but the policy of loosening down payment requirements and financial discloser by the applicant was not the correct answer. The door was now wide open and greed by financial institutions, the public and politicians of both parties was about to run rampant. The Gramm – Leach – Bliley Act actually called The Financial Services Modernization Act of 1999 insured the door would stay open. The bill passed on November 4, 1999; the house vote was 362 to 59 and the senate was 90 to 8, President Clinton signed it into law on November 12, 1999. The end of the trail was unsecured loans to individuals and organizations that had no fungible assets or collateral to insure contract compliance. These loans were then bundled and sold, re-bundled and sold ad infinitum. You couldn’t unscramble these loans with a nuclear devise. The banking acts were overly restrictive and the human reaction to overly restrictive laws is to either ignore them or finds ways around the onerous regulation and the latter is what occurred. The root cause of the Great Depression lay in misguided government policy. Starting with President Hoover in 1930 and the implementation of the Smoot Hawley Tariffs, actually called the Tariff Act of 1930, triggered trade barriers by the rest of the industrialize world. This was further compounded by raising taxes and creating a very tight money supply. President Roosevelt continued these misguided policies; further restricting the money supply and increasing tax rates. It took just over 70 years to arrive at another depression or to be politically correct a giant recession.
The salvation for the “Great Depression” was WWII, which with 16 million men under arms and the requirement to be the arsenal of the allied powers insured full employment for the United States. Rationing during the war years insured massive savings. When WWII ended, the powers at the federal level, showing their economic acumen, anticipated the return of the depression but with all the savings and nothing to buy the American people were ready for massive consumption and industry was ready to supply it. Hidden inside of President Roosevelt’s policies was a healthcare time bomb. He froze wages during WWII, so in order to attract workers businesses offered healthcare as part of a wage incentive. The federal government chose not to tax this as wages. This removed the insured from the healthcare payment issues, creating an atmosphere of something for nothing. In all buy and sell contracts there are two parties that control costs; when one is removed the contract has no balance. Further by not treating the business provided healthcare as wages the government allowed the benefit to morph into a right and lost the related income tax.
I believe Milton Friedman is far more correct in his analysis of economics than Sir John Maynard Keynes. Our problem is we want a perfect solution … there is none. Free markets are messy yet they are correct in that only the consumer determines who succeeds and fails, which really annoys politicians who are control freaks. The current administration wants to level the playing field – no ups, no downs, just a flat line economy. This will guarantee mediocrity; look at the old Soviet Union to see how well it works. The economic fluctuations have a cleansing and renewal effect. Success is dependant on a good quality product the consumer wants or needs at the best price. The team with the best “mouse trap” wins. Supply and demand are the primal law. Attempting to prop up supply, demand or both just delays the inevitable. The results of government tinkering can readily be seen today in the housing and auto markets. Free market pricing based on supply and demand may be painful at times but the problems will be resolved and not pushed down the road. Currently in both markets the supply is high and demand is low. Free market pricing will resolve the problem; prices or supply must decline to increase demand – until that happens we will stay in the doldrums. Pump priming (government stimulus) will just waste more money and delay the inevitable. The contract to buy or sell a product must be based on the reasonable expectation the contract is sound financially, not based on social engineering to balance living standards. The idea of “from each according to his ability to each according to his need” is Marxist doctrine, not free market capitalism and it has never worked.
Government at its finest – where do we go
Here are some ideas worth pursuing. Why not just undo what has been done over the past 40 years and create balanced, common sense, simple financial regulations? Let’s ensure contracts to buy and sell products are based on the expectation the contract is fiscally viable, not social engineering. Healthcare provided by an employer, to include the government, is taxable income. While we are at it, let’s overhaul the federal income tax fiasco. There is no one on this planet that understands or can totally comply with these convoluted regulations. Either a flat tax or a national sales tax would solve the problem. Eliminate all unfunded mandates by the federal government. Passing a requirement for the states without funding is ludicrous. Medicaid is a classical example: 50 percent of the financial burden is borne by the states yet mandated by the federal government. Eliminate any and all subsidies, tax credits and tariffs; if a product cannot make it in the free market so be it. The consumer in reality pays twice for these products; first in the taxes provided to the government to subsidize these products and then in the purchase of the products. We need to let the free market work, with minimal government oversight that will provide for the health and safety of our citizens. Don’t expect perfection or try to legislate perfection; humans are involved – it just won’t happen. Lastly how about some patience? Stop the “knee jerk” reaction to every perceived or real problem.
Now, comes the hard part; decentralization of the federal government by eliminating the following federal departments; Agriculture, Education, Energy, Health and Human Services, Housing and Urban Development, Labor and Transportation. All the functions of these departments can and should be handled by the states. Some states will function better than others and this will create competition among them for the citizenry. Those states that perform well will garner the benefits. All the states due to geography alone require different solutions to similar problems and without the “federal teat” to suckle on they will resolve their own issues at the lowest cost. Additionally, the citizen is much closer to the state government than the federal government; therefore, there will be more cogent control by the electorate. The Department of Homeland Security should be abolished. The U.S. Coast Guard should be moved to the U.S. Navy Department under the Department of Defense. TSA functions should be placed under local police departments and under state control with the National Security Agency (NSA) establishing minimum requirements. Any requirement that places a financial burden on the states must be federally funded. The CIA and the FBI would fall under the NSA with budgets for both organizations administered by the NSA. Should the CIA and FBI fail to cooperate, the heads of both organizations would be fired continually until they get the message. All functions of the Department of Veterans Affairs and the Defense Inspector General would be administered by DOD. FEMA reverts to state control. Governors already control their National Guards; should federal assistance be needed in an emergency, the state National Guard can make the request to DOD for additional support. Private agencies such as the Salvation Army already respond; the local Red Cross can request support from the national organization. The Boarder Patrol moves to DOD. ICE and the Social Security Administration move to the Department of the Treasury. All major elements (Federal Aviation, Highway, Railroad and Maritime) of the Department of Transportation move to the Department of Commerce. This will trim a number of redundant DOT agencies further reducing cost and personnel. The overall total savings will be over $650,000,000; that is almost two thirds of a trillion dollars. It will eliminate almost 400,000 jobs. If Cuba can do it so can we. The Executive Branch of the federal government will have a much better span of control as there will only remain the Departments of Commerce, Defense, Justice, Interior, State and Treasury. It will send a strong message to the remaining departments and allow greater oversight by the executive and legislative branches.
To those who feel the federal government is the only way to ensure health and safety for the citizenry I offer these few recent examples. The Bernie Madoff Ponzi Scheme – a whistle blower warned the SEC years before the collapse. The BP oil spill – the MMS under the Department of Interior reviewed and approved the BP well design and oversaw the operation. The source of the recent salmonella egg outbreak was one of the largest egg farms in the U.S.; it is tough to see the enormous piles of chicken droppings from the FDA office spaces, no matter how thick the lenses. The numerous mine disasters over the past few years – overseen by state and federal bureau of mines under the MMS and the Department of Interior. The Ft. Hood massacre, the “Christmas Day Underwear Bomber” and the “Times Square Bomber” and no dots connected by Homeland Security. How about 9/11? A book could be written about the massive failures by federal agencies which are great about building empires and spending money but lack the ability to get the job done. Local management is better; most take care of those in their own backyard.
It won’t be perfect, nothing is, but it will be vastly better and far less costly than the current environment. Most states have balanced budget requirements and without federal money they will prioritize and work within their means. The fluff will disappear and concentration will return to the necessities.
Create tighter control over the operating expenses of congress. Currently that cost is $4.4 billion annually. If our elected officials want to travel home on weekends when Congress is in session that expense should be borne as an out of pocket expense. If they want to feel our pain they have to start living like their constituents. Congressional staff sizes are huge and need to be cut dramatically. To do so requires taking an axe to their budgets. A goal should be an initial staff reduction of 50 percent. The use of Air Force One is another example of “the emperor has no clothes.” That aircraft exists for official business only; campaigning or vacationing does not fall into that category. Its use should be tightly controlled. How about using military airfields instead of commercial airfields? The cost of operational interruptions at the commercial airports is enormous. We do not elect kings and queens. Air Force One costs $68,000 per hour and that is exclusive of the security costs. The photo operation over NYC cost the taxpayer over $300,000.
These measures will take a President with a great deal of backbone; he or she need only to use the “bully pulpit” to present these policies to the American people – then present them in the budget to Congress. I expect Congress will initially reject the budget as presented. Those members of Congress who reject the budget must be publicly admonished by the President; he must veto any measures the Congress presents without blinking. If necessary he must shut the government down. The future of our country depends on removing this bloated bureaucracy from the backs of the American people. Someone must rise up and save our nation; unfortunately none are in sight on or over the horizon.
We must remove the word “fair” from our vocabulary for as you depart the birth canal all fairness ends; I believe it ends at conception. I always wanted to be the middle linebacker on the NY Football Giants; it was never going to happen so I made the best of what I had.
George Ross, of Cave Creek, is a retired Marine combat pilot and flew commerical aircraft for 21 years. He can be reached at email@example.com