Tuesday, October 13, 2009

"Reagan proved that deficits don't matter"

I'm no fan of Barack Obama, but I'm an even greater un-fan of the tea-party types who caterwaul about the federal deficit. The quasi-Depression created by Bush now makes deficit spending an appalling necessity. Alas, Republicans continue to hold to their ludicrous, bass-ackwards belief that one should run up massive debt during the good years and pay off the tab during bad times (but only if a Democrat is in office).

How soon they forget...

In late 2002, when former Treasury Secretary Paul O'Neill warned that deregulation and high deficits would one day bring about economic catastrophe, Dick Cheney responded: "You know, Paul, Reagan proved deficits don't matter." O'Neill was fired.

The same people now screaming about our sky-high debt tend to worship Ronald Reagan, the man who invented sky-high debt -- even though he (hypocritically) got into office by calling for a balanced budget. Here's how one Reagan hagiographer, writing circa 1999, tried to explain away that inconvenient fact:
Throughout the 1980s the pundits warned that deficits would grow endlessly and menace the future of our children and grandchildren. Actually the deficit in 1989, Reagan's last year in office, was around 3 percent of the gross domestic product - almost exactly the same as when Reagan was first elected. Moreover, in the last year or so the deficit suddenly evaporated and the federal budget is in surplus. Suddenly all the dire prophets of deficit apocalypse look rather foolish.
Of course, the government got out of the red only under Bill Clinton, something that few conservatives care to admit.

The above-quoted text severely re-writes history: Carter's final budget included a deficit of $27.5 billion. By 1983, Reagan was running a debt of $311 billion -- more than a ten-fold increase. During that time, GDP went up about 25%.

(Here's another fact that most people tend to forget: During most of Reagan's two terms, the top tax rate was 50%. Under Clinton, it was 39%.)

This admission may shock you, but I believe that Reagan was right to run up a large debt during the serious recession which plagued his early presidency. As John Kenneth Galbraith noted at the time: "Mr. Reagan, meet Mr. Keynes."

What appalled me at the time -- and appalls me still -- was the fact that Reagan and Bush continued to overspend massively during fat times and lean times. We are still paying off the Reagan/Bush spree; previously-incurred debt did not disappear when Clinton ran a balanced budget.

Then came Bush and Cheney and the Republican Congress. We all know how they spent. Where were the teabaggers then?

Right now, we need larger deficits. You may hate the situation, but it is what it is. The economy will not right itself, because the credit simply is not there. Small business is the greatest job-creator in this country, and banks simply refuse to lend to small business owners.

The biggest lender to small business is CIT group, which faces bankruptcy. Such a bankruptcy will benefit Goldman Sachs (a CIT creditor) but may devastate the larger economy.

No loans will mean no new jobs. Laid-off workers do not purchase goods and services beyond the absolute necessities. Fewer customers in stores will eventually result in more lay-offs, which will result in even fewer customers -- and so the economy spirals down and down and down. Anyone who tells you that the spiral has a built-in reversal mechanism is lying to you.

There will be no turnaround until credit flows, and the flow won't start until Uncle Sam forces the spigot open.

Here's your laugh for the day. I invite you to chuckle at "The Great Budget-Deficit Myth," published by the National Review back in 2003. When the Wall Street Journal reported on Dubya's $200 billion deficit -- the one that Cheney insisted did not matter -- Democratic Senator Kent Conrad said: "His policies have plunged the nation back into deficits and debt, Social Security and Medicare are threatened, and the administration is shortchanging domestic priorities." All quite true. But the conservative NRO scoffed:
Our recent history of large budget deficits and strong economic growth contradict these Democratic claims.
As a matter of fact, the record budget surplus may have contributed to the economic decline of the early 21st century. So there is little substance to Democratic claims that budget deficits are evil.
For example, in the real world, deficit spending triggers economic growth as government expenditures impact the private economy and contribute to an increase in private saving.
We must not lose sight of the fact that stimulative fiscal policy is the critical economic variable in getting the U.S. economy back on a growth path.
Wow. Sounds like deficits are great, great, great!

Except, of course, when a Democrat is president.

17 comments:

Anne said...

Dick Cheney responded: "You know, Paul, Reagan proved deficits don't matter." O'Neill was fired.

O'Neill thought he was appointed to do something when his job, like any other Bush 2 secretary, as well as Bush 2 himself, was to be Cheney's sock puppet.

O'Neill showed incrougable and rank subordination by keeping on trying to do something, so of course Cheney booted him.

Bush 2 secretaries were to be mannequins....can't have them go rouge on you

Anonymous said...

"included a deficit of $27.5 billion. By 1983, Reagan was running a debt of $311 billion -- more than a ten-fold increase"

deficit is not the same as debt, you may wish to edit this for clarity.

-lance

Joseph Cannon said...

You're right, lance. But in popular writing, one needs synonyms to avoid overuse of the same words. Suggestions...?

Anonymous said...

Almost certainly, the '89 deficit attributed to Reagan above was a unified budget figure, meaning it (improperly) netted out the SS surplus against the real, on-budget deficit. Considering that it was $150 billion plus in the SS surplus, his real deficit was likely 50%-70% higher than usually stated. That is, the deficit was NOT the same percentage of the gdp when he left as when he came in. It only appeared to be the same, after the huge SS tax increase created 12-figure surpluses in that account as had never been seen in previous presidencies.

I am no Reaganomics fan, obviously. However, there is SOME truth to the idea that deficits cannot go on growing forever without bad consequences, which we're on the cusp of experiencing already.

The PRIOR sized deficits typically needed the majority of the entire world's excess capital to finance. There isn't much excess capital in the world after the world-wide banking collapse, and what there is out there isn't especially interested in 1% to 3% yields, denominated in depreciating dollars.

So, while of course, yes, the US must run deficits now and for the foreseeable future, this is not merely a continuation of what worked without major problems in the past. We will have major problems with these sized deficits, given the world economic picture.

At a minimum, if Treasury auctions go badly, and lack sufficient buyers to underwrite the new bonds brought to market, you will find the nominal rates exploding several-fold, returning to their old levels (4-6% at least, maybe 8-10% once the snowball of mounting debt hits avalanche levels).

Realistically, where in the world is the $10 trillion in projected extra national debt going to be raised? More immediately, where is $3.6 trillion going to be raised from in the next 2 years?

Since there will not be foreign capital in sufficient quantities, it will likely have to be the Fed creating that much money out of thin air, and then we'll have an unprecedented money supply explosion in this country to worry about.

That is something the Reagan experience did not include, because then, even at its worst deficit levels, there was world capital available, and a sufficient trust factor, that the US in those days could easily finance that kind of annual deficit.

XI

Perry Logan said...

Here's a good one-liner to use at parties: Reaganomics was supposed to pay off the deficit.

Anonymous said...

I am a liberal, proud of it. I also consider myself part of the tea-party movement, regardless of the fact that there are significant numbers of other people who also consider themselves part of the tea-party movement that I disagree with vehemently on a great host of issues. I also consider myself an American, and am proud of it, regardless of the fact that there are significant numbers of other people who also consider themselves Americans that I disagree with vehemently on a great host of issues.

There are some basic fallacies involved in your post Joseph - and it's rare, I have to say that I disagree with you. First, that most "tea-partiers" are conservatives who don't care about deficits unless they are run up by a democratic president. Actually, the reason the movement labeled itself as "tea-party" was to equate it with the whole "no taxation without representation" notion, with an emphasis on representation, not merely being against government spending per se.

Yes, I am extraordinarily troubled by the U.S. debt situation, for reasons I explain below, but what has enraged me - and animates a lot of this movement - is that our most recent US debts, definitely going back to Bush administration debts have been done in defiance of the fact that the vast majority of the american population are squarely against them. Moreoever, the debts are being paid out in ways we do not agree with and with little to no transparency or accountability.

This seems to most of those of us who are "tea-party" people the essence of having our tax dollars spent without representation.

(Second, but more as an aside, there are high-profile conservatives - Glenn Beck and Michael Savage, as 2 examples - who were raging about the US debt build up during the Bush years and have continued to be consistent now, at least in this one area.)

Third, as to deficit-spending itself. I do not agree with those who are against it just because they think all debt is bad. However, there is good debt spending on real investments and bad debt spending which is what we've done for the past 8 years and are continuing to do.

Deficit spending on real infrastructure development and educational improvement would be tremendously helpful, both in creating jobs in the near term and building a foundation for sustainable growth in the future. National high speed rail, free or almost free higher education, a broad-scale apprenticeship program for young adults, free medical training to ensure enough doctors for a future real health care reform, etc.

Instead, we got war spending that went primarily to war profiteers who more than likely are investing outside the US, tax cuts to corporations and the very wealthy - who again are, these days, investing outside the US. And, now under Bush-Bama - bailouts to the financial industry who will never invest that money back in the US, but are mainly investing it in Asia and the BRICs countries. And, a trillion $ stimulus bill that was a non-strategic mess which should have had a laser like focus on real job creation and education but was mostly sprayed around wildly to congressional special interests with no accountability for job creation or long-term infrascturue building.

Now, that's debt you can't believe in. And, yes - as a liberal - I will continue to protest our debt binge as long as we are doing the equivalent of going into debt to buy flat screen t.v.s, hummers, expensive dinners out and more house than we can either afford or need.

Anonymous said...

It's pretty simple. Either you can cut taxes and run deficits, or you can keep taxes the same, or raise them, and pay your bills as a country.

If either the alleged pre-Obama anti-deficit spending Michael Savage or Glenn Beck ever decried the tax cuts, arguing they should be reversed, I would be quite surprised. I doubt it happened. (That was the sole province of a guy like John McCain before he went evil or whatever, and the Savages, Becks, and teabagger types HATED him for that sensible position.)

And there is no doubt that the vast majority of anti-deficit spending teabaggers are NOT suggesting the raising of taxes, which they would perhaps oppose VIOLENTLY, with FIREARMS.

Theirs is an incoherent position. They refuse the only thing that can bring about what they claim to want. Not saying the above poster holds this view, as I have no way of knowing.

But show me any Republican or conservative or 9/12 protestor who says raise taxes to address the deficit. They do not do so.

XI

Alessandro Machi said...

We are now back to my favorite topic, the 15-25 billion dollars in interest rate charges tht consumers are paying EVERY MONTH on EXISTING credit card debt.

EXISTING credit card debt means consumers borrowed money to buy goods and services, businesses showed a profit an then they moved their manufacturing to other countries to reward americans for borrowing.

Americans kept buying gleefully because of the lower production costs from other countries.

The government DOES NOT CREATE manufacturing jobs. The government might order products from a manufacturing company, but there is no guarantee it will even be an american based company.

I suggest we free up more paycheck money every month by suspending the interest rate charges on EXISTING credit card debt for consumers serious about paying down their debt.

15-25 billion dollars a month paid by consumers just to service the interest rate charges on existing consumer credit card debt is what is hurting the economy.

That 15-25 billion dollars a month needs to be circulating among local economies before it inevitably goes back to the banks anyways in the form of debt paydown or savings.

Circulate paycheck money LOCALLY BEFORE it goes back to the banks, and the economy will quickly stabilize, and then begin to improve.

beeta said...

Here is my problem with teabaggers who claim to be liberal:
I am for single payer option or at the very least a public option. So I was against passing the Baucus bill as it was originally proposed. I looked for rallies/online groups that agreed with my point of view. I signed specific petitions/ donated to specific ads/ called my reps and generally participated in activities that related to this subject.
If I wanted to protest deficit spending, I would go about it the same way. I would not attend any rally in which someone said "I want my country back" or "keep the government out of my Medicare" or " Obama is a socialist" or any rally that was organized by Dick Army or Glen Beck or ....
I am mad at our Government, but my reasons are far different from Beck's and Rush's or Hannity's. Furthermore the Republicans duped the Social Conservatives and Moral Conservative into joining forces with them against the left and didn't deliver for them. I think teabaggers are really mad at the Republicans, but they protest anything left or liberal or social democratic because they don't really know what they are mad about.

Anonymous said...

Anon, you say it's not true that:

First, that most "tea-partiers" are conservatives who don't care about deficits unless they are run up by a democratic president.


However, your contention has been made on this site previously (the post was also an unsigned Anonymous starting out with the claim of being a liberal - coincidence?) and it's already been disproven (also on this site) by links to actual wide-ranging investigative reporting, as opposed to your limited anecdotal experience.



Sergei Rostov

Anonymous said...

Bush 2 secretaries were to be mannequins

I am going to have to add this to my list of 150(+) Ways Obama Is Like Bush.


Sergei Rostov

Gary McGowan said...

CIT is to Middle America what Lehman was to the financial "industry." There are many other weak points which could snap first, but that's worth remembering.

Meanwhile, Daily Telegraph says some $6 billion will go to bonuses to be divided among staff, some 5,500 of whom work in London. So total pay and bonuses at the end of the year maybe $22 billion.

If it happens, that's more than $700,000 per employee -- almost twice the average $363,000 last year, or a bit more than the $661,000 handed out in '07.

Where and how do they get all the money? From the labor of HUMAN BEINGS who are intentionally kept ignorant of what's really happening. (The stuff they just print up or digitally create is sucking on past and future labor and production.)

Demand a new Pecora Commission.

Demand Glass-Steagall standards, separating commercial (necessary, more state and local) banking functions as separate from the insane debts created by the financial "industry."

It's a government "by and for the people" only if the people stand up and fight for it. Part of that very difficult fight is within your own mind, freeing yourself from consensus reality, including the mind-polluting nonsense of TV and corporate press.

The Deutschmark of the 1920s was not the world's reserve currency. This stuff of China, Russia, etc “getting out of the dollar” is propaganda. Can’t happen in a meaningful way. Won’t work.

Borrowing money from central banks to enable nations to function is insane, and the results are playing out right now.

The alternative is the system defined by the U.S. Constitution. Don't borrow money from usurious creepy institutions. Create credit based on human dignity, raising the standard of living... cooperate with other nations for mutual benefit. Lincoln did it. Franklin Delano Roosevelt did it. Consensus reality not withstanding.

And don't let intel operations run by God knows who keep sucking the USA into wars in Asia. Can't you see we could be FRIENDS with most of those people in central and SW Asia? The Taliban was intentionally created by God knows who to destabilize that important region to prevent DEVELOPMENT of functioning nation-states who have the power to REGULATE the activities of the financier-elite and cooperate with their neighbors based on common interests.

Accelerating austerity policies and fascism -- That’s the plan, brothers and sisters.

Snarky remarks are the telltale signs of small minds, or worse. Let’s reason together, move forward and create a better world.

run_dmc said...

I'm the anon above who is a liberal and also a supporter of the teaparty movement.

Sergei - please post links to the "wideranging investigative reporting" on the "teaparty" rallies. I admit that my experience with the protests I've attended is anecdotal, but so is everyone else's because there has been no "investigative" reporting that I've ever seen anywhere about the movement.

Which brings me to beeta's comment. Apparently, because I don't protest in beeta's preferred way or only with people who agree with me in every respect, then my liberalness is under question. That is hogwash.

I was for single-payer and have contributed my own money to every congressperson who supported single payer and tried to push it on the Hill. I'm sorry, but I think the "public option" is a complete cop-out meant to pacify liberals who should otherwise be, yes, out in the streets over what most Democrats are doing to what should be the moment to develop real health care reform. However, I certainly do not question the liberal bona fides of people who do support the public option.

Just because I am terrified over out US debt spending doesn't mean I'm not committed to any number of other causes. And, I'll show my committment in my own way - thank you very much.

As for deficit spending and cutting or maintaining taxes vs. raising taxes, there is a third option which I think most of us know very well that conservatives believe. That is, that cutting taxes stimulates the private sector expansion and thereby will increase revenue to the government at the end of the day.

I do not believe that, at least, I don't believe it will work in the way that the conservatives always want to cut taxes - only on corporates and the ultra wealthy. But, they seem to. So, their argument may be wrong (I think it very much is), but it's not actually incoherent.

Anonymous said...

As for deficit spending and cutting or maintaining taxes vs. raising taxes, there is a third option which I think most of us know very well that conservatives believe. That is, that cutting taxes stimulates the private sector expansion and thereby will increase revenue to the government at the end of the day

The problem with that theory (which is sometimes stated by them, you're right) is that they also have another theory they state, which is 'starve the beast.' (meaning the federal government's revenues).

That is, guys like Grover Norquist say he wants to shrink (federal) government to where it can be drowned in a bathtub. It is explicit that the method is defunding the government of revenues by tax cuts. And starting with maybe Reagan's OMB Director David Stockman, THIS starve-the-beast theory, more of an alibi than a strategy afore-thought in my view, was THE dominant explanation of the purported value of running large deficits. NOT the prospect that revenues would pile in, in ever growing amounts.

Note, the large deficit running was DENIED to be the logical and inevitable result of the tax cuts, and those warning that large deficits would occur were attacked as trying to scare the public. When the deficits continuing 'as far as the eye could see' was announced by Stockman upon his budget crunching analysis, this starve-the-beast analysis was created as an excuse.

Even though there are still the supply-sider propagandists out there, they do NOT want extra government revenues for the purpose of paying for expanding government social programs or other spending. As we've seen, should there be surplus revenues, they can't imagine a better use than tax cuts for the overage.

So, there is NO coherent message out of these guys on the deficit. They now complain it is too high, but they deliberately (or perhaps stupidly, not realizing the consequences) shrunk federal revenues in order to force significant cuts, and perhaps the entire removal, in the various entitlement programs.

This isn't theory, but fact. Check out the federal revenues compared to gdp. Under the WPE Bush, federal revenues slid to barely 17% of gdp, a level not seen since the Eisenhower days (and before Medicare and Medicaid were created).

XI

Anonymous said...

An amusing, though staggering, anecdote about when Stockman presented his analysis of 12-digit deficits 'as far as the eye can see':

According to Bob Schieffer's book on the Reagan years, "Troika" member James A. Baker, III exclaimed "holy sh!t! You mean, it really IS voodoo economics?!?!'

Then what did the "Troika" (the unholy trio of key presidential advisors, Baker, Meese and Deaver) get Reagan to do then?

Passed the largest tax HIKE in human history in '82 (DEFRA, the Deficit Reduction Act, authored and passed in the Senate first by Bob Dole), followed by large tax hikes each of the following 6 years, including ANOTHER one that was the largest hike in human history.

Just as Reagan had done as governor of California facing a deficit. (In that case, he raised taxes, including a 50% increase in the top marginal rate of state income tax.)

So, what would Reagan do? Raise taxes, to the level he always found appropriate, and to which he testified before Congress back as a highly paid movie star: 50%.

XI

beeta said...

XI, you are half of the reason I come to Joseph,s site. The other half of course being Joe.

Anonymous said...

Awww. Appreciate it, but others' mileage may vary!

But I do urge any and all to learn and use the 'what would Reagan do? Raise taxes!' argument sketched out above from his actual history of actions in office.

It is the silver bullet, garlic-necklaced, holy water antidote to the dead-ender Reagan cultists. (It would be a little stronger if the taxes raised each year were directly named and quantified.)

Caution, or a bonus: you might see heads explode after the explanation! (Not a bad thing, and too long in coming, if anything.)

XI