Last Tango in DC: The Budget Deficit Drag

  Yesterday morning on NPR's Diane Rehm Show there was an interesting discussion on "The Budget" between Michael Mandel, chief economist at Business Week Magazine and Alice Rivlin, of the Brookings Institution, former member of the Clinton administration and founding director of the Congressional Budget Office.  It was the same CBO that last week issued it's "red ink as far as the eye can see" report noting that this year's deficit will reach $497 billion and that we can expect similar massive deficits throughout the decade.

Where Mandel and Rivlin differed from the politically spun debate we usually have here; i.e.,  the guys that have a deficit play it down and the guys trying to get back in hope it has some negative resonance with voters; in today's dialogue, aptly moderated by Rehm, there was a somewhat more nuanced approach, particularly on the part of Mandel.  Both guests, with some tugging to and fro, agreed that deficits perforce result in a growing drag upon the economy, though Mandel took the approach that the impact was largely little more than noise.

Rivlin cited what she called the "remote" possibility, albeit one we should insure ourselves against, that the ever growing deficit could result in a meltdown of the dollar while Mandel took the historical or rearview mirror approach; that is.; because it's never happened before it isn't likely to happen now. To strengthen his position he argued quite preposterously --given the 40% dip  in the value of the dollar over the last couple of years—that investing in T-Bills is a safe and prudent strategy for foreigners. You have to wonder if he doesn't know who those foreigners are and why they are really buying up our government paper.

Mandel has just written what he describes as an optimistic book on the coming years called "Rational Exuberance".  Judging from his appearance today, his tune seems to go: "technology got us to our dominant position and technology will drive the economy forward" and, I suppose it's fair to paraphrase "we'll grow our way out of this mess."  Mandel further argued on the Rehm show, whenever he got the chance, that the discussion on the deficit was more or less a waste of time. We should, he insisted, be talking about how the US is going to maintain its technological dominance going forward.

And that's what got our attention.  After all, we agree with Mandel on this point, or don't we?.  Technology is what drives this economy.  We cannot compete with cheap disciplined and growingly better educated Asian labor, particularly when we are exporting our know-how as well as our capital to China and everywhere else.  We have, in a way, been hoisted on our own petard as, in our burning desire to smooth over the bumps, we have turned ourselves into the ultimate consumer society.  We now measure economic growth in this country not on how much we build but on how much we can allow ourselves to consume (consumption now accounts for 80% of GDP).  What Rivlin and Mandel fail to acknowledge is that buying more stuff at Wal-Mart, driving bigger SUVs and moving into macmansions on ever flimsier borrowing schemes  http://radio.weblogs.com/0130824/2004/01/19.html  while exporting our capital ($1.5 billion per day to support the trade deficits) does not build a real economy.

What Mandel suggests might be important in some abstract way but utterly preposterous --and therefore misleading-- within the real world of Washington politics. Does he really believe we are going to have a meaningful discussion in Washington about terribly complex subjects within the context of those august branches of government, the White House and Congress, that will transcend money and politics? What planet does Michael Mandel live in? 

What Silicon Valley used to, and most people for that matter still, get quite readily is that the last guys you want messing around with real industrial and economic planning, are the denizens of the political trough and their co-conspirators.  In other words, sure the government funded the development of the Internet but not because they knew what they were doing. It was, after all, because they wanted a bomb-proof; i.e., distributed network that just happened to end up looking like a web.

Ok, so let's see where we might go with this.  If you ask the great Pooh-Bahs of today's Silicon Valley --the five or so guys left standing-- you'd probably get unanimity.  The country needs to get a wide pipe into every home and office in the land.... and then a program to subsidize the cost of supplying such a service to all those people who just don't know what they are missing.  How much would that cost?  They shrug their shoulders. Hard to say.

In other words, out in the real world, you can get a family to shell out $60 a month for cable or satellite so they can upgrade from free antenna service to get ESPN and HBO but don't ask them to spend the extra $15 it costs to upgrade from dial-up to broadband.  There is, perhaps sadly for these folks on the West Coast, a limited demand for broadband services in this country even though dial up is about as clunky as you can get.  Compared to the US, countries like Sweden and Finland have nearly twice as many broadband users per capita.  The Baby Bells, satellite and  cable providers can get faster service into the homes as soon as they figure out a killer app, and it ain't going to be video on demand.

At the same time, we desperately need some old-tech concrete and steel (job creating) infrastructure like high speed transportation networks, so that people have a reasonable chance of getting around in places like Washington DC, Los Angeles and Atlanta.

Okay, so maybe a high speed internet network isn't worth all those billions of public money while we're already running the highest deficits in history.  Not having read Mandel's book, perhaps, his key is, say, biotechnology?  After all, no technology will change the world more in the twenty-first century, than biotechnology.  But wait a minute.  Isn't the biotechnology industry just another synonym for the pharmaceutical industry and aren't these companies some of the most highly capitalized and competitive corporations in the world and didn't the Congress just vote them multiple hundreds of billions of dollars in subsidies with the latest Medicare drug bill?  No, you say, that extra money will be used for TV ads. Okay, so maybe we should give them a boost in exchange for lower drug costs. They'll agree to that! Sure.

How about nanotechnology? That's going to change everything. Perhaps, instead of spending trillions putting a man on Mars in the year 2020 or knocking out a lone North Korean missile in flight we should put that money into creating molecular replicators and assemblers that by the middle of the century might start  growing  products from the ground up, (without human intervention, mind you) much the way organic objects are created, rather than through traditional manufacturing methods?

But, besides the usual problems of government manipulation in markets, both biotechnology and nanotechnology bring their own enormous hyperdisruptive baggage.  Both technologies threaten our very existence on this planet and both will have to be carefully regulated by governments globally.  Can the wisemen in Washington both sponsor and regulate these very tricky developments and get world bodies to follow?  For instance, just today in the Washington Post a company was running an ad promising engineered sex choice for prospective parents.  Just imagine what biotech will be like in 20 or 30 years!  And imagine a world in which molecule-size devices can be trained to make anything that nature can make and anything else that someone might think profitable or the ultimate dominating weapon.

Meanwhile, there is no need to worry that Mandel will be listened to in Washington.  The budget will continue to be stretched into red ink by needs going forward of a deeply entrenched military industrial establishment, an aging baby boom population for healthcare and pension benefits, and a political establishment that can't say no to the lobbyists behind them or an electorate before them desperately seeking another influx of spending money so they can rush out to Wal-Marts and buy some more Made-in-China tchotchkes.

rmb

 

Your comments are welcome.

dymaxionweb@verizon.net

Copyright 2003 Richard Mendel-Black All Rights Reserved

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