The recently announced budget proposals of President Obama are a giant step in the wrong direction. They reward institutions that have brought us to the brink of ruin. They punish individuals, burden the young, and attempt to resuscitate a bloated corporate monoculture. Worst of all, they squander a heaven-sent opportunity to correct a dysfunction that has suppressed American prosperity for almost forty years.
I am a PhD mathematician with wide cultural experience. Our family supported the Afghan resistance to the Soviet Union in the 1980s, and then moved to Tijuana, where we lived seventeen years. All our children reached adulthood there, and our youngest attended Tijuana schools from kindergarten through high school graduation. We've learned from people who are not part of the United States system.
Gurus like The Economist magazine (Jan 24-30, 2009, special report p 22) plead that finance is "the brain of the economy" which "raises growth by around 1% per person per year." Not so. To measure the effort necessary to earn a basket of goods, I devised the Weariness Index, proportional to CPI times the mean hours per dollar earned by an individual worker. According to the data I could obtain for my Book of Honor (1998), this increased (grew worse) by approximately 14% from 1973 to 1987 (p 77). All indications are that the trend has continued since then.
I'm hardly the only one to detect trouble. In Wealth and Democracy (2002), Kevin Phillips shows the results of what he calls "financialization": a rooftop-like peak around 1973 of personal prosperity, after which GDP continues upward but "social health" declines (p 166).
Since 1973, like clockwork, every eight to ten years, the financial lemmings have jumped all together off some cliff, taking us with them. Around 1980 it was the Third World and Mexico loans. 1990 brought the Savings and Loan debacle, 2000 the dot-com bust, and 2008 subprime mortgages. As I prove in my paper Computerized Monoculture and the Failure of the Market this is an inevitable consequence of high-speed communication, concentration and abstraction of ownership, and the resulting compulsory moral hazard (you agree to be a lemming or you lose your job).
President Obama proposes to throw a total of 1.5 trillion dollars into this black hole. That's about $15,000 per family of four - all because he is scared of the "N" word, nationalization. This crazy burden will fall on our children, and their future will be welded to a horrible global monoculture that will fail even more spectacularly in another ten years.
Every loan requires more to be paid back than was advanced to the debtor. Therefore loans cannot be justified in a shrinking economy. The bailout money just does a U-turn into T-bills. The money that matters is the loan repayments being made by everyone who still has an income. This money simply vanishes, leading us ever closer to a depression.
The solution? Think out of the box, like Princeton and other Ivy League universities who a few years ago set free their students by switching from student loans to grants. President Obama needs to let AIG go to its well-deserved fate, and nationalize the zombie gigabanks as they collapse. Government now has the responsibility of providing liquidity to the economy, and therefore it requires the power.
The top management of the gigabanks is worthless and arrogant. Let all the executives disappear. We keep the only real value in the banks: hundreds of branch offices, each with loan officers at their desks. Now give every loan officer a new hat: grant officer. Her new job is to see that funding is provided to match the funds being sucked up by loan repayments. As small businesses are proposed, she picks the best opportunities and funds them by purchasing equity. Since debt service is not needed, these are far more likely to succeed than debt-based startups, and their profits are shared with the bank.
Finally, when it comes time to re-privatize these banks, make sure they are sold to local interests only. Restore the Depression-era laws preventing interstate financial colossi. Only a local bank of the kind depicted in the classic movie "It's a Wonderful Life" can nurture the variety we need in the 21st century.
And that brings us to the second point. Whence will come this burst of creativity, if not from our young people? President Obama proposes to crush the young under estate taxes, while imposing no increased taxes on "businesses," by which is meant corporations. Sole proprietorships are hammered, while corporations go free. This means individuals are forced into corporate structures, where fiduciary duty and fear of minor stockholder lawsuits require everyone to think the same. After a monoculture went insane over subprime mortgages, we want to intensify the monoculture?
Class-warfare issues are irrelevant to the young. My children grew up in Tijuana, but this year, as a Princeton alumnus, I interviewed five applicants to that university. I can testify how little separates the thinking of the fortunate Princeton prospects from the less fortunate Tijuana youth (look at the music for one thing). It's not all good, but they all understand each other, even in different languages. It's the aging powerful in their gated neighborhoods who don't understand their poor fellow citizens, treating them as marketing numbers or even as grapes in a wine-press.
Let the estate tax be abolished, and heavier taxes be placed on all limited-liability artificial persons such as corporations and foundations. Our economy and culture are already in senile lockdown, with no generational passing of the torch for forty years, thanks to this abstraction of ownership. We need new blood.
Each time a young person comes into a multi-million dollar inheritance, his whole city should have a celebration, as they would for a major sport championship. And each time one of us lesser lights gets a grant from the government investment bank, we can at least take our friends out for a beer. That is the path to the future, President Obama, not massive new debts, entitlements, and obligations that chain us to failure forevermore.
Lawrence J. Dickson, PhD (Mathematics)
28 February 2009
Revised 18 March 2009