Summary:  Hard times might lie ahead, forcing difficult choices.   We must clearly understand our alternatives, and their history.  IMO only clarity of thought and resolute wills will see us through the next decade.  How to manage public finances might be our greatest challenge.

Why do we continue down a path which almost certainly ends badly?  Since President Reagan we — citizens, voters — have indulged in an orgy of deficit spending — plus writing ourselves promises of vast future benefits.  The reasons are complex and many.  One is a belief that governments are reliable.  Governments — real governments, of developed nation — do not default.  Or so we believe.

For nearly two years now we have waited for a speech.  We need a simple speech and a direct speech – most of all a political speech – about what exactly happened to our financial system, and therefore to our economy, and what we must do to make sure it can never happen again.

Any day now, the Obama administration will announce $4.35 billion in extra federal funds for under-performing public schools. That’s fine, but relative to the financial squeeze all the nation’s public schools now face it’s a cruel joke.

Calculated Risk directed us to a lesser known economic indicator, real personal income less transfer payments, a measure intended to strip out some of the impact of automatic stabilizers in the personal income data.  I found it an interesting series to play with.  Eyeballing the series, it looked like we were well below trend.  How low?  And how does the trend evolve over time? 

Gretchen Morgenson has a fair number of critics among readers of this blog, which I think is a tad unfortunate. Most of her articles are in fact sound; she is very reliable on executive comp, anything in the equity markets, or where she is working form legal documents, generally lawsuits. It’s when she wanders into debt markets that her attempts to present material to a mass audience sometimes include nails on chalkboard slips.

Increasingly, senior administration officials shrug when you mention the November mid-term elections.  “We did all we could,” and “it’s not our fault” is the line; their point being that if jobs (miraculously at this point) come back quickly, the Democrats have a fighting chance – but not otherwise.

People seeking to incite irrational fears — hoping to make us easy to manipulate – warn that America might “turn into” Zimbabwe.   That’s nonsense, for reasons described here and here.

The real danger:  becoming like Argentina.   La oligarquia and their working class opponents each sought victory, and together destroyed Argentina.  No amount of wealth and power can preserve a nation whose people forget their common citizenship, who divide into groups — each interested in their gains, seeing other groups as their enemies.  This need not end in civil war to drive a nation from wealth to poverty.  Economic stress breeding factions, factions fighting for power prevent agreement on necessary economic and political reforms, this causes a recession.  Repeat until economic collapse forces reform or regime change (for good or ill).   Downhill is always the easy path.

I came across an article in the FT by Gideon Rachman which examined “How Reagan ruined conservatism.” It is an interesting piece which claims that traditional conservatives abhor populism and respect knowledge, while the Reagan Revolution ushered in a ‘new’ conservatism that appealed to those who love populism and disdain knowledge. All very interesting – but clearly an interpretation, an opinion of the political landscape in America.

Summary:  Can Obama make America like Zimbabwe?  Or is this widespread warning a sign that we’ve become gullible fools?  The easy acceptance of this preposterous warning suggests the latter.  It’s sad that such a post is necessary.  Worse, explaining these facts is unlikely to change the mind of many people believing this nonsense.  This is a follow-up to Would a default by the US government help America?, and another in a series looking at the important role of propaganda in modern American politics.