Deep Recession, Huge Scandal

by Gary North
by Gary North

I went to the Sunday Times site on Sunday. Here was the lead headline:

At least half of the House of Commons' 646 MPs will be swept away at the general election, as voters take revenge on the political classes for the expenses scandal.

The departure of 325 members of parliament as a result of forced resignations, retirement and defeat at the polls would represent the biggest clear-out of parliament since 1945.

This was big. Huge. Gigantic. The story has escalated for two weeks. But why? I think it's the economy. It's getting worse, despite assurances by politicians around the world that the recovery is near, the bottom is near, and the public should not panic.

This story is a classic mole hill turned into a mountain. Members of Parliament have been caught in some penny-ante graft: using their expense accounts to pay for personal goodies. They have begun resigning.

Americans expect this as a matter of course. This is why we never get scandals like this. They don't get any traction in the media. Apparently, the Brits didn't expect it.

The Times estimates that 30 MPs will be forced to resign. Another 200 are expected not to run again. About 90 will run and be defeated.

One opinion poll reported that 170 Labor MPs will resign, while 70 Conservatives will decide to seek employment elsewhere.

I don't see how the Tories can run a campaign based on this slogan: "We're only 42% as corrupt as Labor." It doesn't have a vote-getting ring to it. So, the heads of both parties are saying that grafters must resign now. This is a bi-partisan effort to throw overboard everyone who gets caught.

What kind of graft are we talking about? Here is an example.

Ian McCartney, the former Labour party chairman, also announced his retirement in the wake of the scandal. McCartney, the MP for Makerfield, has paid back £15,000 of expenses after buying at the taxpayers' expense an 18-piece dinner set, champagne flutes and wine glasses, a £700 dining table and chairs and sofas worth £1,328. McCartney, who has had heart surgery, said he was going because of health problems.

I see. Health problems. Does he expect anyone to believe this? The press reports this without comment. The charade goes on. But it is not fooling the voters.

The man has been humiliated. He got caught doing what he and his peers have been doing since the 13th century: using public money to pay for personal expenses. He was not alone.

The British electorate is not up in arms. Britain has tight gun controls. But voters are surely ready to throw the rascals out. Well, half the rascals, anyway. The ones who got caught.

Why now? I think it's the recession. People are feeling the economic pressure. They are poorer on paper because their homes have fallen in value. Unemployment is rising. The bubble economy, based on easy money and loans for real estate, has popped.

They see Members of Parliament buying expensive wine glasses when they are having to cut back on beer at the local pub, and they have had it.

This thing exploded without any warning. The Daily Telegraph published a leak of the expenses two weeks ago. It reminds me of Wilford Brimley's classic lines in Absence of Malice (1981). As the Assistant U.S. Attorney General and all-around Good Old Boy, he said:

You had a leak? You call what's goin' on around here a leak? Boy, the last time there was a leak like this, Noah built hisself an ark.

Word has it – the word of the New York Times – that someone got paid $140,000 for the computer disks that contained years of these expenses.

The Speaker of the House – yes, they have one, too – told the news media a week ago that he had called in Scotland Yard to investigate the leak. He actually called for a criminal investigation. Lo and behold, he was up to his eyeballs in boodle. He was forced to resign by Prime Minister Gordon Brown. He was the first Speaker of the House to be forced out since 1695. His resignation speech took 33 seconds.

Ironically, the House of Commons had promised to release the information in July, with everyone's name "redacted," meaning removed. The leak upended that Old Boy Network ploy.

This story is just too good to believed. One Conservative MP had the government spend $3,400 on cleaning out the moat around his country house. His name is perfect: Hogg.

The media are in a feeding frenzy.

IS IT A REVOLUTION?

William Rees-Mogg used to be the editor of the London Times. He is a pro-gold conservative who has authored several books with libertarian author James Davidson. He is a member in good standing in the British Establishment.

On May 25, he had his analysis published in the Daily Mail. He says this is a revolution. If it is, then the voters in Britain have longer memories than those in the United States. Brown can defer an election for at least a year. Given the scandal, the Tories may not object. In the U.S., six months is all it takes for a scandal to die, unless there is continual media attention.

He began with Thomas Carlyle's description of the origins of the French Revolution. He thinks this scandal could escalate. He says that the scandal stories cannot be contained. The revelations just get worse and worse . . . from the point of view of incumbent politicians. He compared this with the unfolding of the recession. At each stage, politicians assured the voters that the crisis had been contained. The dominoes kept falling. The financial analysts also underestimated it.

For the first weeks of this parliamentary crisis, most politicians similarly underestimated the depth of public anger.

Even after the first publication of the questionable invoices, most parliamentarians thought that this was a phase that would soon be forgotten.

The easiest problem to solve may be the one that triggered the greatest resentment. Parliament needs to adopt an open and efficient system of expenses.

I think it is far more likely that Parliament will find ways to keep computer data from being leaked.

No one should make a questionable claim in ignorance. The senior politicians who formulated the House of Commons scheme left it dangerously ambiguous and, therefore, led their colleagues into a trap.

I see. After approximately eight centuries of this sort of thing, senior politicians led MPs into a trap. It surely took a long time to get sprung. I guess this is one benefit of computers. It is easy to steal official figures. The games MPs have played for eight centuries did not reckon with a few computer disks.

Rees-Mogg offered a series of political reform suggestions. One of them is to make the House of Lords an elected body, like the U.S. Senate. That has been the opinion of one of America's great comedic actors, Christopher Guest, master of the mockumentary. His real name is Christopher Haden-Guest, 5th Baron Haden-Guest. He resigned from the House of Lords in 1999, when the House of Lords Act of 1999 banned hereditary peers.

Calling for meaningful political reform always makes for great comedy. This scandal would surely make a great mockumentary. I hope Mr. Guest responds to the opportunity. I would love to see him play the Prime Minister. He could be interviewed by an American newsman, played by Fred Willard.

Rees-Mogg did not indicate how, when, or why his suggested reforms might be implemented, or by whom.

I see no revolution coming, here or there. The public cheers when governments run enormous deficits. To get in a snit over penny-ante boodle is not the stuff of revolutions.

It turns out that Britain did not have a Freedom of Information Act until quite recently. Any news media outlet that blew the whistle on the government risked legal action. This time, things were different.

SMALL NUMBERS, LARGE OUTRAGE

The Brits are providing evidence for the suggestion of the British political theorist and humorist, C. Northcote Parkinson, whose aphorism became Parkinson's Law half a century ago. "Work expands so as to fill the time allotted for its completion." He had other laws, and they were equally clever.

He once explained why government spending grows without opposition. The reason is that no one understands the meaning of the enormous numbers. In the mid-1950's, he used a million dollars as his marker. Today, $100 billion is probably the minimum figure.

When politicians sit down and discuss spending, they talk about billions of dollars. Nobody spends time arguing that an expenditure of (say) $10,000,000 could be cut to (say) $9,400,000. That would save $600,000. But compared to departmental budgets of several hundred billions, so what?

At some point, however, politicians will argue over waste of $50,000. That is when an expenditure is (say) $600,000. The politicians understand $50,000. They know how much waste can be packed into this.

The British voters can understand the waste involved in the expense account boodle. They see politicians lining their pockets with money that the average voter would like to have. They can think of all kinds of things they would rather see this money spent on. They are happy to see the government spend it to improve a local park or soccer field. They are outraged that this money is wasted by the nation's leaders.

Parkinson's prediction that spending would balloon without resistance has proven correct. What the MPs did not understand is the other half of Parkinson's observation. It is the nickel and dime stuff – the penny and shilling stuff – that posed a threat to their careers.

LARGE NUMBERS, SMALL OUTRAGE

The Federal deficit is expected to be $1.8 trillion this year. Voters shrug. They have no comprehension of such a number. No one has ever seen anything like this in an industrial nation. Zimbabwe, yes.

The Federal Reserve System has doubled the size of the monetary base. No one cares.

Capital losses in the stock market and the residential real estate market in the United States are in the range of $5 trillion. This is the estimation of the International Monetary Fund. Under an optimistic scenario, it will take at least five years to recover from these losses, at least as denominated in money of constant purchasing power, which we will not have in America. Price inflation is coming.

The public is saving a little more: maybe 4% of discretionary household income. There are dying malls in the U.S. – maybe 8% of all malls.

But restaurants are still open. Your local mall probably has cars in the parking lot. There is a sense of foreboding, but no sense of panic. There is talk of green shoots, and consumers' are becoming more optimistic about the economy.

Yet the underlying foundations of the economy are broken. Monetary policy is clearly broken. Fiscal policy is broken. Nevertheless, liberal Keynesian economists are calling for more monetary looseness and more government spending on the usual boondoggles.

On May 25, Paul Krugman, 2008's Nobel Prize winner, wailed that California's voters capped property taxes 30 years ago. This has hamstrung the state government's ability to raise taxes.

America's projected deficits may sound large, yet it would take only a modest tax increase to cover the expected rise in interest payments – and right now American taxes are well below those in most other wealthy countries. The fiscal consequences of the current crisis, in other words, should be manageable.

But that presumes that we'll be able, as a political matter, to act responsibly. The example of California shows that this is by no means guaranteed. And the political problems that have plagued California for years are now increasingly apparent at a national level.

Note: "act responsibly" means "raise taxes." But there is good news, he says.

So will America follow California into ungovernability? Well, California has some special weaknesses that aren't shared by the federal government. In particular, tax increases at the federal level don't require a two-thirds majority, and can in some cases bypass the filibuster. So acting responsibly should be easier in Washington than in Sacramento.

But the California precedent still has me rattled. Who would have thought that America's largest state, a state whose economy is larger than that of all but a few nations, could so easily become a banana republic?

In short, there is plenty of room for tax increases in America. He thinks we will get them. Tax increases will keep us from becoming a banana republic.

CONCLUSION

There is no indication in Congress that there will be any organized resistance against budget deficits. But the earthquake in Britain has sent a message to American politicians. The public is spooked by this recession. Any attempt to hike taxes may backfire in 2010 if the recession accelerates.

They also saw what happened in California last week. So did Krugman, and it worries him.

The easy way to tax is by the printing press. This pleases Wall Street. It pleases the banks. It does not produce organized resistance.

The deficits must be funded. Bernanke still has a free ride. Congress will do nothing to rein in the Federal Reserve. Together, Congress, the Treasury, and the FED will continue to produce the one thing that government does well: fiat money.

Be prepared.

May 28, 2009

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

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