My musings on different political topics relevant to America today.

Monday, June 5, 2017

LBJ's Legacy, and Why We Can't Repeat It

I went to the LBJ museum recently.  Its on UT Austin's campus.  The first thing you notice is the obelisk like monument deifying LBJ.  You look up to see the whole thing, while the hot simmering Texan sun glares down on you from above.  First thing I thought was, "Everythings bigger in Texas, including our museums."

It took a good 4 hours to walk through the whole museum, most of which was about Lyndon Baines Johnson (LBJ for short).  The most captivating part of the whole experience was watching the short film about him.  The film was filled with emotional music and imagery, walking you through a nolstagic montage of a Texas legend.  You couldn't help walking away believing LBJ was a great man.

Large portions of this graph are the legacy of LBJ, most notably
the portion titled "Medicare & Health".
The craziest thing about LBJ is that most of the modern U.S. government is, essentially, a legacy of his Presidency.  Seeing the sheer number of programs that were initiated by LBJ, that continue to this day, was mind boggling.  He created HUD (U.S. Department of Housing and Development), passed the 1965 Immigration Act (which is the foundation for our current immigration policy), created Medicare and Medicaid, and much much more.

If one studies the rest of history since then, one is struck by how little has been accomplished since, relatively speaking.  LBJ had a once in a century opportunity to remake American society in his image, and he seized upon it.  It hasn't been just been our country either.  Most western countries have suffered the same fate.  France has a term for their nolstagic period called the "Les Trente Glorineuses", which took place between 1945 and 1975.  The story in much of the Western developed World is the same.  Its one of swift economic, social, and political changes, then seemingly out of nowhere, a steady calcification of the existing order.

Economic growth has declined, population growth has declined, and political change is virtually non existent.  It seems the decisions made by one generation have slowly unravelled, and we live with their legacy.  Meanwhile, the room for effective political discourse and effective political change have virtually disappeared.  One may ask, why is this?  Why is it that LBJ was so effective in passing countless laws, and that overall his agenda was popular across the nation?  

I do believe there is an answer to this.  I do believe there is an answer to the discontent we feel with the President and with the political class, but sadly, I don't believe people will like the answer.  The answer, in my humble opinion, is that the period after WW2 was an extremely unusual period.  I believe we have this fond ideal rooted in nolstagia of the ability of Presidents and Congress to affect meaningful change, that simply doesn't square with reality.  I believe we keep expecting LBJs to arrive and shake things up in a way that was possible then, but frankly, isn't possible now.  

The U.S. is closer to the bottom, and is also closer to the
bottom in terms of revenue. (chart obtained from OECD website)
Your next question will then be, "Well, why isn't it possible now?"  Its not possible now because  Western governments have no room to grow.  The U.S. is a fortunate exception to this, which at least has some room.  Another problematic point is that increasing the government's role in the economy will require more revenue.  Those are surmountable issues, especially for the U.S.  However there is a lingering one that flips the discussion on its head, U.S. government debt.  

Already, 6% of U.S. Federal spending, (thats not including state governments) is spent on paying interest on the debt.  That may seem manageable, and it is, as long as interest rates do not go up.  The problem is, interest rates most likely will.  The reason being, that the current interest rates the Federal government is paying are low by historical standards.  Part of the reason interest rates are low, besides a less than robust economy, is financial repression by the Federal Reserve.  

The Federal Reserve is in charge of managing the U.S. money supply.  Its officially independent of influence by the Federal Government, but historically speaking, this seems unlikely.  Part of its policy has been to keep interest rates low, which supposedly will stimulate the economy because it will be cheaper to borrow money.  However here is the interesting part, the Federal Reserve has been, since the Financial crisis, paying interest on deposits kept at the Federal Reserve by member banks.  This serves as a disincentive for member banks to lend out the money they have been given by the Fed, because why lend it out, when one can earn risk free interest at the Fed?  One may scratch your head at this policy if the point is to provide cheap credit to borrowers, but thats the point.  I don't believe thats their main goal.  I believe the main goal is to engage in financial repression to keep interest rates low so the Federal government can borrow money at historically low rates.  

The ultimate question is if this policy is sustainable.  If it is, then perhaps the U.S. government can engage in another Johnsonesqe campaign of massive growth in government spending.  However even then its questionable, because entitlement programs for the elderly are bound to naturally grow far larger in the future as the elderly live longer and become a larger percentage of the population.  Other countries have no room to grow government because of this.  The U.S. has slightly more room, since our population is younger, but not much more.  It could be dangerous to expand government when our current programs may require massive tax increases already.

That was a lot of technical jargon, so let me boil it down.  Back in the 50's and 60's, we had a once in a lifetime get out of jail free ticket, to borrow some monopoly jargon.  Our government debt was low relative to GDP, our economy was growing rapidly, and our population was young and dynamic.  This simply is no longer the country we live in today.  Our population is not old yet, but its fair to say its middle aged.  Our debt to GDP ratio is high, and its high in an era of peacetime, which is unprecedented in U.S. history.  Government is already large, and taxes are already a large proportion of the economy.  This means that the future debates will no longer be about whether to expand government, but on how to allocate current government spending.  This is why politics is so much more bitter than it was.  Back in the day, one could simply create a government program.  Now, to create a government program, at least in the long run, due to demographic trends, it will require another program is cut.  Hence the dilemma we are in today.  There are no more get out of jail free cards.  Now we have no choice but to serve our sentence. 

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