Entries from February 2000

Learning To Love The National Debt

David Frum February 21st, 2000 at 12:00 am Comments Off

If Americans
do things his way, President Clinton vowed in his State of the Union, "We
will pay off our national debt for the first time since 1835." This
promise is now being treated as an unequivocally good thing. Alan Greenspan has
endorsed it. Republican John McCain has adopted the Clinton debt-repayment as
his own, down almost to the last comma, while George W. Bush is buying ads in
South Carolina to emphasize that he’ll devote more than four times as much
money to debt repayment as to tax reduction.

Somebody
should ask — So, how’d things go after 1835, the last time the sovereign debt
of the United States was retired? The answer is: Not so good. Within two years
of the 1835 debt repayment, the country plunged into the worst economic crisis
of its first half-century of independence. And while debt repayment was not the
sole culprit, it certainly made matters worse. Debt repayment is deflationary;
and that is as true today as it was 150 years ago.

As
Alexander Hamilton realized when he pointed out that a moderate public debt
could be a public blessing, federal obligations function as money. Somebody who
has a $ 1 million Treasury bill feels just as rich as somebody with $ 1 million
in cash. The bill is virtually as liquid as cash. When the government takes
money from people in the form of taxes and then uses those taxes to buy up and
extinguish its bills, it is shrinking the money supply just as surely as if it
made a bonfire of $ 100 bills on the Mall.

How
fast would the money supply shrink? The U.S. public debt now stands at about $
5.7 trillion. In comparison, the total amount of U.S. currency in circulation
is only about $ 500 billion, of which rather less than half is probably held
inside the country. In other words, the Clinton administration is now proposing
to eliminate the equivalent of the entire currency supply — and then to
eliminate it again next year, and again the year after that, every year for a
decade. No wonder the bond markets have been jittery all week.

Defenders
of the Clinton plan express hope that this monetary squeeze will reduce
interest rates. It very well might. But low interest rates are not an end in
themselves: They are valuable because they promote growth. If we achieve low
interest rates in a way that depresses growth more than the low interest rates
stimulate it, we haven’t really achieved anything — just ask the Japanese, who
have been slumping for a decade despite interest rates that are close to zero.
The same thing could happen in the United States.

This
may sound counterintuitive. Mistrust of public debts and the bankers who
finance them is strongly felt. Public-spirited citizens pay large sums of money
to erect electronic "debt clocks" on street corners, on traveling
flatbed trucks, and now on the Internet, to keep track of the ruin into which
they perceive the country slipping, minute by inexorable minute.

But
what has always mattered most is not the size of the debt in dollar amounts,
but the size of the debt relative to the country’s ability to pay. Look at what
happened to the World War II debt, for example. In the summer of 1945, the
United States was burdened by the most staggering debt in the nation’s history:
nearly $ 260 billion, which actually exceeded the country’s gross domestic
product. By the end of 1960, that debt had grown somewhat, to $ 290 billion.
But as a percentage of GDP, it had plunged to almost half its level 15 years
before.

The
alternative method, the one tried in the 1830s, did not work nearly so well. By
overtaxing the economy to repay the debt as rapidly as possible, President
Andrew Jackson triggered a financial panic, which settled into a prolonged
recession. The debt so laboriously discharged in 1835 mushroomed after 1836: By
1843, the United States had amassed a debt nearly as big as the one it had in
1832, when Jackson determined to drive the debt to zero. The experiment was
never repeated.

Nor
should it be repeated now. Repaying the debt will not do what President Clinton
promises (and John McCain imagines) it will. It will not reduce the burden of
America’s Social Security obligations — they will remain as large as ever. It
will not bolster the country’s ability to pay those obligations — that depends
on the speed at which the U.S. economy grows over the next 15 years, which in
turn is affected very greatly by the tax rate on productive activity.

Overtaxing
Americans to repay the national debt will actually lower the capacity of the
United States to honor its commitment to Social Security. How does that make
any sense?

Bankruptcy Reform As A Moral Issue

David Frum February 11th, 2000 at 12:00 am Comments Off

From campaign finance to welfare, it sometimes seems that Congress in the 1990s has spent all its time coping with the unintended consequences of the 1970s. The latest example: Last week the Senate passed amendments to the bankruptcy code of 1978 that would make it somewhat more difficult for middle-income consumers to escape all their debts by entering Chapter 7. The House did something similar last year.

Intended to spur risk-taking, the 1978 bankruptcy code’s leniency also stimulated one of the world’s great waves of consumer debt-skipping. In each year of the booming 1990s, more than a million Americans have declared bankruptcy. The number of bankruptcies relative to population hit an all-time peak in 1998, and has slipped only slightly since then.

Bad debts have a long history in America. Resentment of their obligations to London merchants radicalized the Virginia gentry in the 1770s; at his death in 1826, Thomas Jefferson owed his creditors the then-staggering sum of $100,000. But until recently that kind of debt was a rich man’s privilege. Middle-class debt almost always had to be tethered to some sort of security: a house, a car, even an appliance bought on the installment plan.

As late as 1968, banks carried only about $1.4 billion worth of credit-card debt; auto loans accounted for 20 times as much. But between 1968 and 1982, the amount of credit card debt on the books multiplied by almost 50 times. By 1980, the average American adult carried more than 3.5 cards in his wallet. Today, the credit card market is 25% bigger than the auto-loan market.

Permissive bankruptcy laws were among the causes of this explosion of consumer debt. Easy bankruptcy is for consumers what credit guarantees are for businesses: a promise from the government that life can be played on a heads-I-win-tails-you-lose basis.

The best proof of the 1978 law’s power is the sequence of events. The four years after 1978 were economically very volatile: there were two recessions, inflation soared and plunged, interest rates twice scraped 20%. You’d think bankruptcies would increase during such difficult times. In fact, the great takeoff in the number of consumer bankruptcies began in 1985, a year of economic smooth sailing. Bankruptcy filings declined in 1992 and 1993, economically weak years, and then rocketed upward after 1994. (They did decline somewhat in the early part of 1999.)

On the evidence of these numbers, Americans are going bankrupt not because they’re economically hard-pressed, but because they have figured out that bankruptcy today is neither uncomfortable nor embarrassing. Under the 1978 code, you can go bankrupt and keep the house, the car and the retirement account. You can use bankruptcy to evade alimony, rent and college loan payments.

Early indications are that President Clinton will resist tightening the bankruptcy code, though the House and Senate versions of the bill both passed with veto-proof margins. Expect to hear that more stringent debt-repayment obligations will burden women; the National Organization for Women has already declared its opposition to bankruptcy reform, as has Senate candidate Hillary Clinton. These arguments aren’t wrong — if we make bankruptcy more difficult, it’s a good guess that half of those affected will indeed be women — but they’re not to the point either.

What we’re really arguing about when we argue about bankruptcy law is how far individuals should be expected to go on carrying responsibilities that have grown onerous. Americans have always believed that there must come a point where individuals can let those responsibilities go; U.S. bankruptcy law has been about the most lenient in the world since the beginning of the republic. But in the 1970s, the limits of financial responsibility were dramatically reduced, to the point where a great many people shrugged off the very idea that paying debts is a moral obligation.

It’s not a coincidence that this weakening of the sense of financial obligation occurred just Americans were diminishing their feelings of obligation to family, community and nation. And if it isn’t a coincidence, then it may be that the moderate tightening of the bankruptcy law Congress now contemplates is an indicator that society is turning its back on the 1970s ethic of self in favor of a reinvigorated ethic of duty.

Terrorism And Liberalism In The ’70s

David Frum February 7th, 2000 at 12:00 am Comments Off

1Glass,
glass everywhere: That’s what travelers saw when they entered Washington’s new
Dulles International Airport in 1959. Under a concrete roof that curved like
the takeoff trajectory of a jet hung four vast windows without a retaining wall
in sight. And beyond the glass, there was only the sky — the sky that America
ruled in the way that Britain had once ruled the waves. It was from the air
that America had dropped the atomic bombs that ended World War II. It was by
air that America had sustained its hold on West Berlin during the darkest
moment of the Cold War. It was through the air that the Voice of America and
Radio Free Europe subverted the enemy Soviet Union. And it was via air that
millions of newly prosperous Americans, their wallets stuffed with their
almighty dollars, were inflicting the new industry of mass tourism upon the
unhappy residents of Paris and Rome.

You
can still see the glass at Dulles. But you can’t see much of the sky. The vista
overlooking the runways is now chopped off by a long wall, broken at intervals
by doorways that lead to metal detectors and x-ray machines. It’s incredible
now, but within the memory of people now living, air passengers routinely
walked from the door of the airport to their seat on the plane without being
searched, scanned, or interrogated. And this was not seen as remarkable or
miraculous: It was ordinary, normal, the way things were expected to be.
Despite (or maybe because of) the international tension of the 1950s and ’60s
– despite the Berlin and Cuban Crises — the Eisenhower and Kennedy years were
a time of security for Americans from dangers much below the level of
thermonuclear holocaust. Americans had reason to fear war, but they did not
have to fear that some bomb-carrying fanatic might blow their airplane to
smithereens.

The
first task of government is to guarantee the safety of the citizen, and that is
a task that after 1970 Western governments performed less and less well. Over
the Labor Day weekend of 1970, teams of Arab commandos seeking the release of
Sirhan Sirhan, the Palestinian assassin of Robert Kennedy, performed the spectacular
feat of simultaneously hijacking four jumbo jets, two of them the property of
American airlines. Two of the hijacked jumbos were flown to Dawson’s Field,
near Amman, Jordan. Four hundred passengers, 150 or so of them Americans, were
held hostage for three weeks until Jordan’s King Hussein mobilized his army to
force the release of the captives. The empty planes were blown up by the
hijackers in a headline-grabbing act of destruction.

The
first airline hijacking recorded by history occurred in Peru in 1930, when
officers attempting a coup diverted a plane to drop leaflets over Lima. The
United States suffered them intermittently in the 1950s, mostly by bank robbers
commandeering planes to make good their exits. But so long as planes had
relatively short flying ranges — and so long as there was nowhere within that
range for a would-be hijacker to commandeer a plane to > — hijacking’s potential was severely limited. Then,
on February 21, 1968, Lawrence Wilson Rhodes stepped aboard a Delta Airlines
DC-8, pointed a pistol at a stewardess after takeoff, and demanded to be flown
to Havana. Over the next two years, his example would inspire an assortment of
crooks on the lam, lunatics, black nationalists, and Castroite radicals to
commandeer a total of 38 American planes, 37 of them to Cuba. None of these
hijackings resulted in death or injury. The Cuban authorities behaved politely
enough, feeding the abducted passengers roast beef dinners and selling them the
famous local rum and cigars at duty-free prices before sending them home.

These
early hijackings were not without their ludicrous aspects — "Take dees
plane to Cooba!" became the punch line of wearisome nightclub comedians –
but their import was not funny at all. The United States was no longer able to protect
its citizens from international anarchy. And through the 1970s, international
anarchy obtruded itself ever more terrifyingly into American consciousness.

Between
1968 and 1981, terrorists murdered the American ambassadors to Guatemala,
Sudan, Cyprus, and Lebanon, the prime minister of Jordan, the prime minister of
Spain, the chairman of Germany’s second largest bank, the front-runner for the
presidency of Italy, the uncle of the Queen of England, the President of Egypt,
and, very nearly, the commander of NATO and the pope. Thousands of perfectly
ordinary people were killed or maimed by international and domestic terrorism
in Argentina, France, Germany, and Uruguay. The Irish Republican Army, an
organization largely financed by money raised in the United States, murdered
2,261 English and Irish people between 1969 and 1982, was responsible for 7,500
bombings that claimed the lives of more than 600 people, and deliberately
crippled more than one thousand journalists, businessmen, and ordinary fellow-Catholics
who failed in the opinion of the IRA to show sufficient enthusiasm for the
cause.

No
grievance seemed too obscure to provoke terrorism. In May 1977, gunmen
demanding independence from Indonesian rule for South Molucca, a territory once
known only to the clever 11-year-olds in the National Geographic Society’s
annual geography bee, seized 105 schoolchildren and their six teachers at a
school in the small Dutch town of Bovensmilde. Another South Moluccan band took
hostage 50 adults aboard a commuter train. After nearly a three-week standoff,
Dutch marines assaulted the train and the school. All the children were saved;
two adult hostages and all the terrorists were killed.

No
portion of the earth’s surface was too idyllic to attack. Black nationalists
murdered the governor-general of Bermuda and his military aide as the two men
walked the governor’s dog after dinner in March 1973. A British diplomat and a
French-Canadian cabinet minister were kidnapped in October 1970 by terrorists
demanding the independence of Quebec.

No
season of goodwill was too sacred to be profaned. A team of Palestinian
terrorists attacked the Munich Olympics in September 1972 in an attempt to
kidnap the Israeli Olympic team. The incident ended in the violent death of all
11 athletes.

No
taboo was so awesome as to go unviolated. One leader of the German Red Army
Faction, also known as the Baader-Meinhof gang, drew up plans to bomb the
headquarters of what remained of Jewish communal and religious life in West
Berlin "in order to get rid of this thing about Jews that we’ve all had to
have since the Nazi time." He was caught before the plans could be carried
out.

Terrorism
worked, in the sense that it
intimidated. In the summer of 1976, two German terrorists and five Arab hijackers
seized an Air France jetliner en route to Tel Aviv and flew it to Uganda’s
Entebbe Airport. Ugandan dictator Idi Amin had food and supplies waiting and
deployed troops around the perimeter of the airport as soon as the passengers
were marched into it. On the ground, the two Germans took command. They
released the non-Jews and held the Jews. "Among the hostages at
Entebbe," wrote a leading authority on the Baader-Meinhof gang,
"there were a few who had been in Hitler’s concentration camps. Once again
they found themselves being sorted out, Jews from non-Jews, the Jews selected
to die. Once again they were ordered about by guards with guns, shouted at to
move quickly —
Schnell! — this
time by a German woman hijacker, who also felt it was necessary to slap them.
One of the captives went up to Bose [Wilfried Bose, the leader] and showed him
a number indelibly branded on his arm. He told him that he had got it in a Nazi
concentration camp. He said he had supposed that a new and different generation
had grown up in Germany, but with this experience of Bose and his girl comrade,
he found it difficult to believe that the Nazi movement had died. Bose replied
that this was something quite different from Nazism." Israeli commandos
flew 2,000 miles and attacked the airfield in the middle of the night,
scattered the Ugandans, killed the terrorists, and saved all but one of the
hostages. The world’s political leaders did not dare applaud. United Nations
Secretary-General Kurt Waldheim condemned the Israeli raid on Entebbe as a
violation of Ugandan sovereignty. The government of France, the owner of the
hijacked plane, offered not a single word of praise or thanks to Israel. The
Ford administration managed to summon up only a milky expression of
"satisfaction" that the lives of the passengers had been saved.

Supineness
in the face of terrorist violence was such a distinctive trait of the 1970s
that the phenomenon acquired a useful shorthand name: the Stockholm Syndrome,
after an incident that occurred in the summer of 1973. Two ex-cons attempted to
rob a bank in the Swedish capital. Police burst in on the robbery and, to
protect themselves, the crooks grabbed four hostages and fled into the bank
vault. The police besieged the robbers for five days, and finally flushed them
out by drilling holes in the vault ceiling and dropping tear gas inside. Then a
curious thing happened. One of the hostages emerged to announce that she had
fallen in love with and intended to marry the lead crook. The syndrome entered
ordinary speech a year later when Patty Hearst, the media heiress, threw in her
lot with the political radicals who had kidnapped her. She denounced her family
and fiance on tape recordings. "I have changed — grown. I’ve become
conscious and can never go back to the life we led before. . . . My love . . .
has grown into an unselfish love of my comrades here, in prison and on the
streets." Hearst even toted a gun alongside her captors in an April 1974
San Francisco bank robbery.

The
Stockholm Syndrome seemed to grip the whole world. All too often, it was the
targets of terrorism who endured the blame for the gunmen’s crimes. The
influential French newspaper Le Monde
expressed this line of reasoning forcefully in a 1977 commentary on the
outrages of the Baader-Meinhof gang: "Only a society that is itself
monstrous can produce monsters."

The
Carter administration fell victim to the Stockholm Syndrome, too. In a speech
given soon after the Iranians took 52 American diplomats in Tehran hostage,
Secretary of State Cyrus Vance urged Americans not to get too upset over the
incident. "Most Americans now recognize that we alone cannot dictate
events. This recognition is not a sign of America’s decline. It is a sign of
growing American maturity in a complex world." When Vance’s boss,
President Jimmy Carter, warned a few weeks later that there was a limit to
American maturity, the Ayatollah Khomeini mocked him: "He [Carter]
sometimes threatens us militarily and at other times economically, but he is
aware himself that he is beating on an empty drum. Neither does Carter have the
guts for military action, nor would anyone listen to him." (When Carter
finally attempted military action, which crashed and burned in the Iranian
desert in April 1980, Vance resigned in protest.)

But
America was not an empty drum. After a decade of insults, large and small, the
Iran hostage-taking snapped the country out of its defeatist funk. Disc jockeys
began playing a comic new song to the tune of the Beach Boys’ "Barbara
Ann": "Bomb, bomb, bomb; bomb, bomb Iran." "What’s flat and
glows in the dark?" went a popular joke. The punch line: "Iran, 24
hours after Ronald Reagan’s inauguration." The Iranians must have heard
the joke too. Before the 24 hours had elapsed, all the hostages were released.

The
humiliations of the Carter years stiffened America’s spine. A constellation of
influential ex-Democrats — Paul Nitze, Irving Kristol, Eugene Rostow, and
Norman Podhoretz — formed a "Committee on the Present Danger," to
rally the country for rearmament. In 1975, only 18 percent of Americans said
the country was spending "too little" on defense. In 1978, still only
28 percent said the country was spending "too little." But by 1980,
an overwhelming 60 percent majority worried the country was spending too little.

Carter
never quite managed to understand what the country was bothered about. He
scorned Ronald Reagan’s demand for firmness and resolve, telling reporters that
Reagan’s criticisms of his policies reflected Reagan’s "apparent
inability" to understand the complexities of arms control. "If you’ve
got just a strong military and you are jingoistic in spirit, and just show the
macho of the United States," Carter explained to 50 Chicago suburbanites a
month before the 1980 election, "that is an excellent way to lead our
country toward war. . . . The Oval Office is not a place for simplistic
answers. It is not a place for shooting from the hip. It is not a place for
snap judgments that might have serious consequences." But if the choices
were simplistic answers or Carter’s answers, simplicity could look mighty
appealing. In September 1980, Leon Jaworski, a former Watergate special
prosecutor, signed up as the honorary chairman of "Democrats for
Reagan." When reminded by a reporter of his earlier harsh assessment of
the Republican nominee — not five months before Jaworski had described him as
"an extremist whose over-the-counter simplistic remedies and shopworn
platitudes trouble the open-minded and informed voter" — Jaworski
replied, "I would rather have a competent extremist than an incompetent
moderate."

It
was the collapse of social order at home and the ebbing of American prestige
abroad that shattered Democratic liberalism. As anti-Vietnam protesters battled
police outside the 1968 Democratic convention, a pollster asked the American
public whether Mayor Daley had done right to unleash his cops to club and
arrest unarmed students carrying "We are your children" placards.
Sixty-six percent said yes, Mayor Daley was right; only 20 percent said no. The
Daley poll asked Americans to take sides between the forces of order and the
forces of disorder. By inventing excuses for riots, condoning crime, and
cringing before terrorism, Democratic liberals finally convinced the public
that only conservatives and Republicans could be trusted to maintain order.
"Since 1960," observed a Yale anthropologist who lived for two years
of the middle 1970s in Canarsie, a working-class neighborhood adjacent to
Kennedy Airport in New York, "the Jews and Italians of Canarsie have embellished
and modified the meaning of liberalism, associating it with profligacy,
spinelessness, malevolence, masochism, elitism, fantasy, anarchy, idealism,
softness, irresponsibility, and sanctimoniousness. The term conservative > acquired connotations of pragmatism, character,
reciprocity, truthfulness, stoicism, manliness, realism, hardness, vengeance,
strictness, and responsibility." In 1980, the Roosevelt Democrats of
Canarsie voted overwhelmingly in favor of Ronald Reagan, the Jewish precincts
nearly as heavily as the Italian ones.

Americans
in 1980 were not returning to the era of laissez faire. Rugged individualism no
longer swayed them. But neither did the soft social-democratic ethos of the
middle years of this century that had ushered in a bloody decade of terrorism.
Americans were moving on to something new: a creed that blended the antique
ideal of self-reliance with a new sense of entitlement. It was a fuzzy
political idea — perfect for the fuzzy era to come — and the struggle to
imbue it with meaning would define the politics of the post-Cold War era.