Democrats Set to Stimulate Economy into Soviet Style Collapse


            One of the major reasons for the collapse of the late Soviet Union was the continued infusion of money into obsolete heavy industry like steel.  The steel industry was well connected politically and had the muscle to direct rubles its way.  Similarly, Brezhnev made the strategic decision to steal computer software from the West.  A domestic software industry, the leading edge technology of the day, implied an open society that the Soviets abhorred.  Unfortunately, by the mid 1980’s the Soviet military went to the leadership and told them that without a domestic software industry, the Soviet Union would remain permanently behind the West in weaponry.  It was that realization that led to the loosening of the restrictions that ultimately led to the collapse of the Soviet Union’s dictatorship.


            The same thing is happening in the United States.  Faced with a faltering economy, the federal government and incoming Obama administration is proposing borrowing massive amounts of money to spend on the obsolete infrastructure that is responsible for getting the country into the current mess.


            Bailing out the automobile industry, the most pampered and subsidized industry in the history of the so-called capitalist world, is an outrage.  Governor Jon Corzine of New Jersey is trying to drum up support for the “bold” stimulus plan.  What’s bold about it?  The price tag, $1 trillion.


            How is the money to be spent?  On yesterday’s news New Jersey’s Senator Robert Menendez held a press conference in front of the 80 year old Pulaski Skyway to promote a $200 million rebuilding plan.  The Senator tried to frighten everyone by saying it had the same construction as the collapsed I-35 bridge in Minneapolis.  Meanwhile, New Jersey Transit, the public bus operator, has cancelled its free 800 information number because of “budgetary reasons.”  Now, anyone wanting to get bus information on the phone, has to pay for a phone call which can take five or ten minutes on hold.


 Investing Tax Exempt Government Borrowings in the Old Economy Bankrupted New York City in the 1970’s


            Until the 1960’s, the economic base of New York City was manufacturing.  The garment center, for example.  In the 1960’s, the Port Authority of New York and New Jersey, a bi-state agency created by Congress in 1922 to rationalize operations in the Port of New York which is divided between the two states of New York and New Jersey, got into the mass transit business when it took over the money losing Hudson and Manhattan Railroad.  The Hudson and Manhattan carried commuters from Newark and Jersey City into lower Manhattan.


            The Hudson and Manhattan was profitable until massive expenditures by the Port Authority of New York and New Jersey on motor vehicle tunnels and bridges (and airports) lured the railroad’s commuters into buses and cars.  It seemed logical for the Port Authority’s surpluses to be used to subsidize the commuter services its facilities made into money losers.


            With the Hudson and Manhattan, the Port Authority acquired two office buildings in lower Manhattan.  When the Port Authority decided to build the World Trade Center on the West Side rather than the East Side, it was the Hudson and Manhattan’s office tower sites that became the building plot.  Unfortunately for the economy of New York and the world, the Hudson and Manhattan site was not big enough to accommodate the gargantuan dreams of Governor Nelson Rockefeller and the Port Authority.  More than the Hudson and Manhattan land was needed.


            The Port Authority, with its power to issue tax exempt bonds and condemn property for “public purposes” cast its covetous eye on the surrounding neighborhood.  The Hudson and Manhattan’s neighborhood was radio row, the heart of New York’s electronics industry.  With the Hudson and East River piers becoming out of date because of the advent of containerization of shipping cargo, the old piers would have made perfect factories for the production of televisions, radios, stereos and other electronic devices.  This would have provided manufacturing employment for the low skilled

immigrant and minority ghetto dwellers who needed work.


            Long story short, the Port Authority destroyed the electronics industry, the economic base of the last half of the 20th century, to build a monument to the economic base of the 19th century.  The World Trade Center was nothing but an office building.  The neighbors and others fought against the misuse of eminent domain to take their businesses for the construction of an office building (that, incidentally, never made money.)  In order to pretend that an office building was related to the Port Authority’s core mission of rationalizing operations in New York Harbor, the buildings were named The World Trade Center. 


            The construction of the World Trade Center was such a bad economic decision, that in the beginning the State of New York had to lease 50 of its 200 floors for state offices.  The construction of the Trade Center and the misuse of its power of eminent domain and issuance of tax exempt bonds was fought in the courts all the way to the Supreme Court, twice.  The powers that be decided that the manufacturing jobs in electronics would be exported to low wage nations with no environmental laws like Japan, Korea and China; while New York would become a financial capital and the low skilled workers would become unemployed welfare recipients or illegal drug suppliers for the white collar workers in the finance industry.


            The misuse of public powers to subsidize the obsolete economy of the past and destroy the high employment economy of the future drove New York City into bankruptcy in 1975, coincidentally the year the World Trade Center was completed.  It also provided a template, being followed now by the Democrats, for how to use misuse public assets to drive a governmental entity into bankruptcy.


Demographics and Trusts, the Real Cause of the Economic Collapse


            In the past, old people died.  Now, they live on and on in declining health and increasing expense.  This is a problem of success, namely the success of the medical profession in prolonging and improving people’s lives.  Nevertheless, longer life has unintended economic consequences that have not been factored into the model.  Clearly, people need to extend their working lives.  One can not go to school until age 25, work until age 55, and live until age 85 and expect the numbers to add up.  No thirty year work life is productive enough to support twenty-five years of school and thirty years of retirement.


            Another consequence is that in the past when people died their money passed on to their heirs.  The heirs then either squandered the money on sex and gambling, or created new ventures which either failed or succeeded and employed people, creating jobs and tax revenue.  Today, even when people die, they are likely to have put their money in trust to avoid taxes.  So, the heirs, while owning the money, do not control it.  Consequently, there has been no venture capital available in the past thirty years to create the new industries necessary to replace the currently collapsing economy. 


            Too much of the capital in the United States is controlled by a small coterie of investment bankers and lawyers all of whom are constrained by fiduciary duties, not even necessarily to the beneficiaries, but to their unborn children or grandchildren.  These lawyers and professional investment advisors are required to not take risks in order to preserve the capital for future generations.  In effect, this means that all the accumulated wealth has only been able to go to two places, real estate and stocks of existing companies.  Using trust funds for venture capital is “risky” and therefore, forbidden.


            Naturally, this structure of finance has resulted in the inflation of stock and real estate prices while people with good ideas for new industries or products in the real physical economy have no chance of getting funding to put their ideas into practice.  So, the most richly rewarded executives of the past two or three decades have not been the people who produce jobs and products, but the people who built financial pyramids for buying and selling stocks and financial instruments, the mergers and acquisitions mavens. The current proposal to create more debt to spend on supporting real estate and stock prices and rebuilding existing infrastructure is, like the Soviet funding of the steel industry, doomed to failure. This is why the markets are failing to respond to the bailout proposals.  People are not fools.


 The nation is in desperate need of venture capital.  The collapse of the financial system is not a financial problem, it is an economic problem.  The good old economy of the 1960’s. 1970’s, 1980’s and 1990’s has done its job.  It’s time for something new.  But like the Soviet system, the two party system is so inert and set in its ways that it is unable to respond.  A major reason was the stolen election of 2000, where a bunch of lawyers thought the 538,000 vote margin of Al Gore didn’t matter.  Bush took his victory as a sign he didn’t have to listen to anyone, and didn’t.  Now, we have to clean up the disaster of the past eight years without the hundreds of billions of dollars needed to retool but that were squandered enriching the richest 10% and being flushed down the drain in Iraq.  That’s why we’re in the worst economic crisis for eighty years. 


A Way Forward


            More than thirty years ago, Chief Naval Machinist’s Mate Joe Schaffer told former Master Chief Machinist’s Mate (SW) John E. Kraft, Sr. “If you come to me with a problem, and you don’t have a solution in sight, they you’ve become part of the problem.”


            Here are three common sense ideas to help revive the economy, not one of which is being floated by the current crop of office holders.  1.  The entire economy except for the government bureaucracies operate on a 24/7 basis.  Banks, supermarkets, stores, everything is open ten, twelve, fourteen, twenty-four hours a day, six or even seven days a week.  The government is open five days a week from 8:30 to 4:30, or 9 to 5, and is closed weekends and all major holidays.  Our elected officials are surrounded by an iron curtain of security that makes communicating with them impossible.  To say they are out of touch is the understatement of the century.


            The government needs to be open and accessible like the rest of the economy.  That will make it much more productive, even if it consumes the same amount of money.  Cutting the cost of government will do almost nothing, because it is the way it operates that is having a negative impact on the economy.  This includes the schools.  Only 70% of the students are graduating from high school, and the schools are only open 50% of the year, also from 7 or 8 to 2 or 3.  Getting out of this mess means everyone is going to have to work harder and smarter.  Those in the private economy already work all the time.  The only people who don’t have government jobs.  It’s time for the government to catch up with the rest of us.


            2.  There needs to be new sources of revenue.  Primarily, trusts need to be taxed, not on their income, but on their net worth.  The tax code should be rewritten to encourage money held in trust to be distributed.  The had of the dead has too big a role in determining current economic policy.  There needs to be a wealth tax on trusts some of which should be made available for venture capital on a competitive basis.  From this fund, along with university and industry research and development spending, the new industries for the new jobs and the new economy should emerge from the natural competitiveness and risk taking of ordinary people.


            3.  Drugs like marijuana, cocaine and heroin need to be legalized and taxed.  (If you tax hard drugs high enough, no one will be able to afford them on a regular basis.) This will not only create a new source of revenue, it will result in massive savings because many of the people in American prisons are non-violent drug offenders.  It will also reduce the revenue stream to organized crime, including the Taliban that uses drug proceeds to buy weapons to kill American soldiers.  This will enable massive savings in the prison system and free up a lot of valuable court time so that white collar criminals, like Bernard Madoff, can be caught and prosecuted before they bring the world economy to its knees.  When a person goes to prison, his or her family suffers.  Most relatives of criminals are innocent people.  When I taught in the inner city all my serious behavior problems were either born in jail or had parents in jail.  Only violent criminals should be incarcerated.


            Furthermore, recent studies show that marijuana use in Holland, where it is legal, is lower than in the United States, where it is illegal.  Why?  One reason is that in Holland, when someone is stoned, the parents or friends can openly criticize the pot head, ridicule him or her and get them help or just tell them, in public, to stop.  Being legal also diminishes the allure of doing something forbidden.  In the United States, the criminal justice system doesn’t deter crime, it profits from people’s misfortunes.  For example, the child molestation laws have been written so that therapists are required to turn in someone who comes to them for help.  This is a big disincentive for people to seek help for friends or relatives who they know are offending or doing drugs.  No one wants to turn their children or parents into criminals. 


There is not a law enforcement solution to every problem.  An economy is nothing but communication and exchange.  To surround every communication and exchange with security burdens the economy with extra costs without compensating efficiencies.  It also reduces the number of exchanges possible because it discourages and slows them down.  Turning every school into a prison neither increases security nor improves education.  There has never been an external attack on a school in the United States.  Every attack has come from students already in the school.  The biggest threat to students comes from deviant teachers, so almost all the school security expenditures are a waste of money.  So in addition to the former structural causes of the economic collapse, the post 9/11 mania for security everywhere is another contributing cause.  In the wake of the 9/11 attacks Osama bin Laden said his goal was to bankrupt the United States. Maybe he understood the American economy better than we do. 


            This is not a comprehensive program, and some parts might even be wrong.  But what they illustrate is that the Republicans and Democrats brains have ossified.  There is no creative thinking.  All they can come up with is driving everyone deeper in debt to continue to do what we have been doing that brought us this catastrophe in the first place.  If you have other ideas, I’d be happy to add them to this article. 


Contact: Joshua Leinsdorf


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