The impact of language on understanding: two small examples

The morning Post is often the catalyst for my blogs. This morning’s edition provoked the following two comments.

According to the Post, in an article reviewing a speech by the justly highly respected Secretary of Defense, “President Obama has pledged to reduce projected spending on national security by $400 billion over the next 12 years, the ‘preponderance of which would come from the Department of Defense,’ Gates said.

That’s on top of $78 billion in long-term spending reductions that the defense secretary announced earlier this year, as well as $100 billion that he said would be cut from wasteful or inefficient programs and reallocated for new weapons and other purposes.”[1]

In the very next sentence the Post says: “All told, the cuts would leave the Pentagon with flat budgets — increasing just below the rate of inflation — until at least 2024.”[2] What does this mean? It means that on the basis of the proposed “cuts” defense spending would increase every year for the next twelve years at a rate slightly below the assumed inflation rate over that period, i.e. real spending would fall slightly. The $478 billion cut in spending over that same period, refers to cuts from currently budgeted or assumed increases over that period. Readers need to pay close attention to understand the meaning of such numbers.

Another article in today’s Post reports on a survey of public attitudes about raising the debt ceiling of the Federal government. The survey finds that more people are concerned about the dangers of raising the debt ceiling than of defaulting on the debt (77% to 73%).[3]  This is strange. The reason they worry about raising the debt ceiling is that it could lead to an even larger federal debt over time. The only reason to worry about that (aside from legitimate concerns about the negative effect on the economy of larger government expenditures, which, of course, could be paid for with tax revenue without an increase the debt) is that if the debt gets too large the government might default. So how is it that people worry more about something that might lead to default than they do about default itself?????

Trying to imagine the consequence of the U.S. government defaulting on its debt is rather like trying to imagine the affect of all out nuclear war. It is unimaginable. A short, temporary default (a failure to pay interest on and repay maturing debt for a few weeks) might not be catastrophic, but it would certainly destroy the high confidence the world now has in owning U.S. debt and would add a significant risk premium to any subsequent U.S. government borrowing. But a longer default would not only lock the U.S. out of domestic and international capital markets (no more borrowing), but would also destroy the dollar’s international reserve currency status (over half of dollar bank notes are held abroad) instantly, and bankrupt thousands of banks and other firms holding U.S. debt. The knock on effects to the world economy (of which we are very much a part) truly are beyond the world’s experience and beyond imagining.

The Rule of Law

The idea that government exists to serve the interests of the people rather than the other way around is modern. It underlies the attitude that Americans and the citizens of other democracies have toward their governments. The essence of this idea and of democracy is not that rulers are chosen by the people; it is that however they are chosen their rule—their powers—are limited by law. The rule of law and the limits it places on the power of the state to interfere with our lives is the essential foundation of our liberties, not voting.

Government involvement in the provision of a service or product is a game changer. There is a centrifugal force that draws private players, “special interests,” into influencing outcomes by influencing politicians and government bureaucrats rather than by competing with better services or products in the market place. This centrifugal force must be continually resisted by limiting what government gets involved in and by insisting on the rule of law. Failure to do so creates a government that looks and behaves more and more like, well, like what we are seeing. America has been exceptional in its success and in its attitudes toward the liberty on which it rests. This exceptionalism is worth fighting (continuously) to preserve.

Richard Lowry & Ramesh Ponnuru explain American exceptionalism as follows:

“It was, to simplify, the most individualistic elements of En­glish society — basically, dissenting low-church Protestants — who came to the eastern seaboard of North America…. America was blessedly unencumbered by an ancien régime. Compared with Europe, it had no church hierarchy, no aristocracy, no entrenched economic interests, no ingrained distaste for commercial activity. It almost entirely lacked the hallmarks of a traditional post-feudal agrarian society. It was as close as you could get to John Locke’s state of nature…. All of this made Amer­ica an outlier compared with England, which was an outlier compared with Europe.

“The late Seymour Martin Lipset defined [the American creed] as liberty, equality (of opportunity and respect), individualism, populism, and laissez-faire economics…. Liberty is the most important element of the creed. To secure it, the Founders set about strictly limiting government within carefully specified bounds.”[1]

War always weakens liberty. When forced, people usually chose security over liberty. A never-ending “War on Terror,” if permitted to continue for too long, threatens to significantly undermine the liberty we are trying to defend. The growing importance of our military might, and the industrial and political interests that feed and support it—the military-industrial complex—will ultimately destroy our exceptionalism. We have been saved so far by our deep tradition of limited use of our military might, our exceptionally capably, honorable, and professional military officers, and the civilian control of their activities. I have written about this theme before: “Eisenhower’s farewell address 50- years later”, “When Values Clash”, “Keep it lean”.

But when our security is threatened we can be tempted to set our principles of respect for human dignity aside. The willingness of some short-sighted individuals to contemplate torture as a tool of warfare in such times illustrates this danger. A number of good articles have been written on this issue. One of the best was by Aryeh Neier: “Enhanced to the point of torture”. Other excellent discussions include: “The Torture Debate”, “Torture is immoral and doesn’t work”, and “Gitmo and us”.

The entertaining Robert Redford movie “The Conspirator,” is a dramatic illustration of the dangers and folly of setting aside the rule of law for what a ruler believes is the interest of the country. The movie depicts (whether historically accurate or not I do not know) the overriding of the important principle of the due process in the “interest” of national healing after the assassination of Abraham Lincoln. I recommend the movie.

Almost everything about government is a slippery slope that can only be prevented by continually challenging the entry and expansion of government into new areas and activities. Some times with proper limits and controls they are justified. More often they are not.

[1] Richard Lowry & Ramesh Ponnuru, “An Exception Debate” National Review Online, May 16, 2010.

The Astana Economic Forum

Hi from Astana, the capital of Kazakhstan.

I am here for the IV Astana Economic Forum at the invitation of Robert Mundell, the Reinventing Bretton Woods Committee, and the Eurasia Economic Club of Scientists. Formally I was invited by Nursultan Nazarbayev, President of the Republic of Kazakhstan, but I sure that he doesn’t know about it, though he will open the meetings. I will continue my year of talking about the IMF’s Special Drawing Right (SDR), which started in Paris in December and continued in Nanjing in March. I will explain my proposal for a global real SDR issued by an international currency board.

My fellow presenters include a number of Nobel Prize winners: Roger Kornberg (Chemistry), Sir James Mirrlees (Economics), John Nash (Economics and who looks nothing like Russell Crowe) and of course Bob Mundell. Other distinguished speakers include Jacob Frenkel, Chairman, JPMorgan Chase International (and my former IMF colleague), Hernando de Soto, economics author and former governor of Peru’s Central Reserve Bank, Richard Cooper, Professor of Economics, Harvard University, and Domingo Cavallo, Former Minister of Economy of Argentina. I am participating with the latter two in a Press Conference on Wednesday.

It is a long way to go for a two-day conference but it should be interesting.