With my first essay in this “disaster” series, I thought one or two would be plenty.  Alas, the disasters just keep on coming.  Now we have Obama’s first proposed budget, and it simply takes your breath away.  

First, a dose of reality.  From a purely financial disaster standpoint, former Bush economic advisor Larry Lindsey put it in concise perspective recently on CNBC, as follows:  The proposed budget bill when combined with the so-called stimulus package will result in a budget deficit of over 12% of gross domestic product (GDP).  By comparison, the 2008 deficit percentage was 4% of GDP.  About half of the increase will be financed by the increased savings of Americans; the remaining 4% of GDP must be borrowed or printed.  To put this in further perspective, according to the Congressional Budget Office, the largest expenditure increases by the Federal government in response to a recession since 1948-49 were just over 2% of GDP in both 1973-74 and 1981-82!  Who will lend us the funds to finance this gigantic sum?  Long term bond rates have been increasing in anticipation of this unprecedented borrowing demand and inflationary expectations and, based on Lindsey’s rounds among world financial centers, investors are not generally willing to finance these deficit levels for our ”social transformation”.  Therefore, a large portion of the deficit must be monetized by our Federal Reserve, in other words, printed.  This is the hottest of monetary growth, highly inflationary, and will cause the dollar to tank, thereby debauching our currency and defrauding current bond holders.

For corroboration of this scenario, look no further than liberal Washington Post columnist Michael Kinsley: “Even if the stimulus is a magnificent success, the money still has to be paid back…………There is another way: don’t pay it back……..Just three or four years of currency erosion at, say, 10% per year would slice the real value of our debt in half…………Inflation works only as a surprise or betrayal.  It can never be part of any public, official plan……..But if that’s not the plan, what is?”  At least he’s being honest about the dirty little secret. 

Where were you from 1966 through 1982?  Remember the massive monetary growth spawned by the Johnson Great Society which gave us fifteen years of stagflation cured only by the Reagan tax cuts and the crushing monetary policy of Paul Volcker’s Federal Reserve?  That was a walk in the park compared to the prospects offered by the Obama recovery and budget plans.

Folks, nothing about this has anything to do with a recovery plan.  It’s a bold and audacious attempt to transform American society in the vision of the progressive movement of the early 20th century.  The Obama budget is even subtitled, “Reviving America’s Promise”, a paraphrase of the The Promise of American Life, the progressive “bible” written in 1909 by their patron saint Herbert Croly, one of the founders of The New Republic.  Listen to David Broder: “…a change of domestic policy of historic size…..it could remake the government’s relation to American society…”; to E. J. Dionne: “….he has sought, subtly but unmistakably, to alter the nation’s political assumptions, its attitudes toward collective action and its view of government”; to Robert Reich: “We can basically say goodbye to the philosophy espoused by Ronald Reagan and Margaret Thatcher”; and to Charles Krauthammer: “….the current crisis gives Obama the political space to move the still modest American welfare state toward European-style social democracy”.

A few people are slowly beginning to wake up.  Obviously, the financial markets have voted NO in about as loud and clear a voice as can be expected.  Some of the more responsible members of the moderate wing of the Democratic Party are getting nervous.  Many of Obama’s upscale “left coast” financial backers in the technology and venture capital communities are having doubts about his true priorities.  But there can be no false sense of security that the progressive left will heal or correct itself.  They basically see this through the lens of those media fellow travelers like Dionne, Reich, Paul Krugman, and the amen corners at the New York Times and in the upper reaches of the elite universities.  This is the opening they have been waiting for since Reagan came onto the scene, and it will require an enormous effort, including a large dose of the kind of moral courage that has been a rarity of late, to turn the tide.  As Pat Buchanan has suggested, “it’s pitchfork time”.

Joint Chiefs of Staff Chairman Admiral Mike Mullen moved us one step closer to reality recently with his statement that Iran now has enough enriched uranium to build a nuclear bomb, thus confirming a similar report by the United Nations nuclear weapons agency.  Secretary of Defense Robert Gates was quick to add that “there is some time”, but how far are we from the day when we will be forced to confront a nuclear-armed fanatic that has pledged to eliminate us and our strongest and only true Middle East ally?  Everything we have attempted has failed–talks conducted by the Europeans, sanctions, economic and diplomatic pressure–and in fact, much of it has served to embolden Iran’s Ahmadinejad, who knows very well that we will not get help in the form of pressure on him from Russia, even if we concede on every contentious point with Putin–Georgia, Ukraine, the Eastern European missile defense shield, etc.  And he also knows that the United Nations Security Council will veto any proposed resolution of military force against them.  President Obama’s team is “studying” the management of relations with Iran, and evidently remains committed to diplomacy in an international configuration as an end in itself.  Meanwhile, this is not a rhetorical exercise for Israel; it is life or death.  And the new Israeli government being organized by Benjamin Netanyahu will not be bashful about moral clarity on the issue.  Nor should we.  

I have just read a short, but compelling book, Faith, Reason, and the War Against Jihadism, by George Weigel.  In it he reminds us that the war we are in (and have been since at least 1979) requires first, that we understand our enemy.  In describing Ahmadinejad, he distinguishes his mission from that of the Sunni jihadists like Osama bin Laden, who want to restore the Islamic caliphate.  Shiite jihadists like Ahmadinejad have an entirely different objective: to hasten the return of a messianic figure, the Twelfth Imam, who will cleanse the world.  Hence, the mission is of an apocalyptic cast of mind and he and his cult believe that they are obligated to do whatever they can  to hasten this age, including incinerating Israel and its allies, even if it means self-destruction.  Not exactly the symmetry in a relationship that makes it anywhere close to analogous to our Cold War with the Soviets.  So I wish our President well in his diplomatic attempts, but meanwhile, we’d better be well prepared, militarily as well as emotionally and politically, for the next step, which might come sooner than we think. 

One of the most insidious consequences of the worldwide recession, particularly if it persists for an extended period, will be the growing tendency toward “economic nationalism”, or, to put it more bluntly, the protection of markets, industries, and jobs by home countries who feel threatened by free trade in a shrinking economy.  It’s a natural emotion, and one fanned by populist demagogues to their political benefit and often the detriment of their people.  Of course, the worst example of this phenomenon was during the Great Depression, where the “beggar thy neighbor” trade policies spawned by the disastrous Smoot-Hawley Tariff Bill in the U. S. is generally considered to have greatly deepened and prolonged the worldwide slump. 

In A Splendid Exchange: How Trade Shaped the World, a great book that I reviewed last year, author William J. Bernstein takes a slightly different view of the impact of Smoot-Hawley, but one that is instructive in any case.  He says that, contrary to common belief, the bill did not significantly decrease overall trade flows, it probably resulted in only a 1-2% decrease in world gross domestic product, protectionism was already a big problem even before its adoption, and that it merely represented the peak of world protectionist attitudes.  Notwithstanding that somewhat different take, he acknowledges the really significant long term damage done by the bill and the attitudes that it represented.  Its most devastating impact in his opinion was the damage done to the intangibles of trade: the expansion of consumption beyond domestic goods, commerce with and living among foreigners, and understanding their motives and concerns.  He believes that these damages had a significant bearing on the subsequent growth of economic nationalism and the run up to World War II.

This point is worthy of further debate at another time, but I submit that it has some relevance to our current situation.  If we encourage and/or pursue the growth of the attitudes represented by economic nationalism, it will have a huge impact on our interests, but will have even a greater negative impact on those developing nations who desperately need open access to world markets for their often limited competitive products.  In fact, according to Bjorn Lomborg of the Copenhagen Consensus Center, the completion of the stalled Doha Round of free trade negotiations, now in their eighth year, would represent the biggest global stimulus package that we could otherwise design, producing $120 billion per year in direct gains by 2015, $17 billion of it going to the poorest countries. 

Conversely, if we continue to stall these talks and block further progress in liberalizing trade with notions like “Buy American” provisions and unrealistic labor and environmental restrictions, it will not only damage our interests, but serve to alienate our potential partners and provide ammunition for the demagogues who prey on the emotions fired by economic nationalism.