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Don't fear the growing deficit. (Fear Reagan)
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The growing deficit may be the single greatest obstacle faced by progressive reform today. The irresponsible economic policies of the last thirty years (yes, that includes you, Mr. Clinton) that precipitated the Democratic takeover have produced a towering deficit that seems to have hamstrung the agenda of the newly empowered party. The looming specter of astronomical foreign debt has provided a near universal go-to for opponents of reform, who frequently claim that any new expenditures would be irresponsible if not disastrous, given our struggling economy. Efforts to reform the health insurance industry may ultimately be undone by this fear of new expenditures. Mr. Obama himself has put a limit on the cost of this effort that simply does not allow for the initial aims of this legislation. Even efforts to alleviate the current economic situation through stimulus are being undermined by the perceived "danger" of the rising debt.
The need for spending as stimulus has been acknowledged at points, such as the passing of the highly controversial Recovery Act. The nearly $800 billion legislation included $580 billion of direct government spending. According to ProPublica.org, only about 19 percent of this (nearly $111 billion) has actually been spent. (The rest of the stimulus bill consists of $212 billion in tax cuts, only $63 billion of which have been issued.) Therefore, at this point any judgment as to the success or failure or the stimulus is simply nonsense.
My concern is that once the Recovery Act goes into full effect, it will prove ineffective not due to its theoretical foundation, but instead due to the fact that it is simply not enough. Proponents of the concept of government spending as stimulus often invoke Franklin D. Roosevelt's management of the Great Depression as an example of its efficacy. Opponents counter that it was not the New Deal that brought us out of the Depression, but World War II.
As it turns out, both are right. According to Northern Trust, between 1933 (the year Roosevelt took office) and 1937, the unemployment rate dropped from a peak of above 25 percent to around 11 percent. By this measure, Roosevelt's policies were initially a tremendous success. It was in 1937, though, that FDR, fearing a rising deficit, abruptly changed course, both cutting spending and raising taxes (an approach I think both sides can agree to disagree with). Unsurprisingly, this quickly brought the steady decline of unemployment back to a sharp rise. Roosevelt's problem here was not with the the principles behind his initial approach. Instead, it was the fact that he simply did not go far enough...that is, until external influences forced his hand.
On December 7, 1941, Japan's bombing of Pearl Harbor pushed the United States into full-scale involvement in the Second World War. Over the next few years, concern over the national debt was pushed aside as the U.S. government poured an unprecedented amount of money into the economy. The national debt more than doubled, rising from about 50 percent of GDP to over 120 percent. The eventual result was a reinvigorated economy and the end of the Great Depression. Yes, World War II ended the Depression, but it did so through massive government spending.
Obviously, this debt did not cripple the U.S. economy for years to come. Instead, the responsible regulation that began with the New Deal led to sustained economic growth and prosperity that coincided with a consistent decline in the national debt. By 1980, the debt had dropped to around 30 percent of GDP.
The greatest problem facing us today is that we do not have such a well-regulated economy. Instead, we find ourselves standing in the ruins of the artificial prosperity brought about by the neoliberal (which, ironically, means neoconservative) economics of Milton Friedman as made popular by Ronald Reagan. This hands-off approach to economics has repeatedly proven incapable of providing the kind of sustained growth needed to reduce even the current national debt. This was apparent long before Friedman and Reagan were even born, but has become painfully so since.
Of course, Mr. Friedman did not invent laissez faire economics. In fact, in the U.S. it was modus operandi up until the Great Depression. When looking at pre-Depression U.S. history, one will find an interesting pattern of "bank panics" occurring every fifteen to twenty years. A bank panic is basically a period of deflation and systemic insolvency in which lending is essentially frozen. The typical trigger for these phenomena is the "economic bubble", common during this period. After Roosevelt, these bubbles disappeared, as did the economic volatility they had previously wrought. Until the late 70s this allowed for the sustained growth of the U.S. economy.
During the Carter administration, this stability was upset by irresponsible spending. Mr. Carter was maybe the best human being we've ever put in office, but his lack of understanding of fiscal policy hampered his noble, but overly ambitious efforts. Spending that does not coincide with comparable economic growth results in high inflation and, as a result, high unemployment, both of which we saw toward the end of the 1970s. During an economic crisis, inflation and deficit spending are often necessary incursions in an effort to provide stimulus. During relatively normal economic times, it can often prove to be irresponsible, as it did then. The understandable result was a genuine feeling of disenchantment with the current state of affairs amongst the American people. This disenchantment proved to be the seed that led to the rise of the "New Right", unwittingly sewn by a champion of the Left.
In 1980, two important events occurred. The first was the repealing of caps on interest rates and other usury laws by a Democratic congress. Second, and far more important, was the election of neoconservative "savior" Ronald Reagan. In the short run, Mr. Reagan's policies successfully brought an end to hyperinflation and significantly lowered unemployment. Unfortunately, this was done through irresponsible tax cuts and deregulation that precipitated the disenfrachisement of millions and the artificial prosperity that brought about the return of the bubble economy.
This artificial prosperity was exposed for the first time during the savings and loan debacle of the late 80s. The resulting deflationary insolvency essentially showed this crisis to be the modern reincarnation of the bank panics of years past. The "bubble", the prosperity of the Reagan era, had been built not on real growth, but on debt. When this debt led to insolvency, further debt was incurred in order to prop up the system. As a result of the massive tax cuts and lack of oversight synonymous with the Reagan/Bush I era, the national debt rose consistently, nearly doubling by the time Bill Clinton took office. Mr. Clinton managed to reduce the debt, but also continued the deregulatory agenda of his predecessors. Imaginary growth was allowed to continue, and then accelerate under Bush II. (Deficit growth also returned under "W".) Eventually, this led to the meltdown with which we are currently dealing, another modern incarnation of the bank panic.
The end results of the irresponsible tax structure and ridiculous lack of oversight and regulation resulting from the Reagan era are simple. In 1980, when Mr. Reagan was elected, the United States was the world's number one manufacturer and lender. In the time period since he took office, we have ceded both these titles to China (and are now actually the world's leading borrower.) As for the artificial prosperity, most of us haven't even seen a dime of that. Since Reagan came into office, the top one percent as seen tremendous gains in income and most of the top ten percent have done well. However, when adjusted for inflation, the average income of the bottom 90 percent of Americans is actually lower today than it was in 1980. (These figures are actually from 2007, before the current recession, but lets go ahead and assume this hasn't improved since.) On top of this, intergenerational upward mobility, supposedly a key benefit of a "free market", is statistically lower in the U.S. than even relatively socialist Scandinavian countries like Sweden and Norway.
The results of the Reagan legacy more than warrant its complete abandonment. Without significant reform (reinstatement of Glass-Steagall would be a nice start) we will find ourselves in this position once again, regardless of how we extricate ourselves from it. A proven method of stimulus is targeted government spending. The current stimulus is not especially well-targeted or expansive enough. Therefore, more will be necessary. Without the abandonment of laissez faire ideology, we would never recover from the rise in debt. With a return to the economic policies of the mid-20th century, however, we can afford to spend our way out of this. It has worked before and it can work again.
Updated October 19, 2009: Some comments have led me to believe that my article is not entirely clear. First of all, I am not blaming government spending for the "bubbles". In fact, I am positing government spending as the answer to our predicament. The deficits are not the cause of the bubbles, but the result of their combination with irresponsibly low taxes. The policies of Ronald Reagan allowed for consumer spending debt to create bubbles of prosperity that were neither real nor sustainable. Eventually, as in the savings and loan debacle and the current crisis, this artificial prosperity exposes itself and the economy stagnates or collapses, eliminating much of the jobs and income that it created. I also mention that Reaganite deregulation largely continued through the Clinton years, which therefore cannot really be separated in this regard from the rest of the last thirty years.
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