Washington budget battles have rendered American government dysfunctional, with little likelihood that the horizon will brighten any time soon. The key issue giving the rebel tea partiers lift and credentialing their budget demands is the rising American national debt. Absent that concern, their pleas for fiscal austerity would likely be received by voters, even in Republican primaries, with little more enthusiasm than accorded them (rightly) by economists. Jobs, social issues, taxes and the like certainly excite voters, and gerrymandering matters, but the glue that holds the tea party together is debt.
Tea partiers are legitimately vexed by the long history of budgetary abuse by big government American Republicans, with a particular focus on the budget betrayals of the George W. Bush administration; like his father, Bush’s deficits doubled the national debt. But their focus should instead be on Ronald Reagan, whose upscale tax cuts and spending sprees nearly tripled the national debt. In contrast, the Clinton years added nothing to the national debt and the rise under President Obama has proportionately been far less than under Reagan or under either of the Presidents Bush. These Republican presidents cut taxes, but spending discipline collapsed so badly that they outspent Democrats, as Floyd Norris and Rex Nutting have documented.
Budget scolds such as Peter Peterson describe Reagan’s profligacy in apocryphal terms: with his deficits draining 90% of private-sector savings away from investment:
The 1980s and 1990s may be remembered, with bitterness, as a turning point in America’s fortunes – a period of transition when we took the British route to second-class economic status.
And here is the genuine conservative Murray Rothbard, writing to colleagues at the Ludwig von Mises Institute:
A mass of politically interested people are totally misinterpreting and even misrepresenting the Reagan record; focusing, like Reagan himself, on his rhetoric instead of on the reality… Whatever this is, it is emphatically not reducing government expenditures.
One factor was Milton Friedman’s foolishness that big deficits “starved the beast” by suppressing government spending. Another was former vice President Richard Cheney’s claim that “Deficits don’t matter.” Why did he get away with that foolishness?
That brings us to Alan Greenspan and the year 2001. While the national debt had increased nearly six-fold under Reagan and GHW Bush, rapid growth featuring the technology boom, tax hikes and budget discipline under Clinton had eased the US onto a remarkable fiscal glide path by 2001. The Congressional Budget Office projected the national debt dwindling to zero by 2008. GHW Bush ended the cold war by… well, doing nothing, allowing events set in motion to play out. And his son could become the towering President who eliminated the national debt by… well, doing nothing, allowing events set in motion to play out. The heavy lifting had been done by President Clinton.
25 January 2001 is a date you should remember because it proved to be the most momentous tipping point in American fiscal history. Likely never again will an American central banker be poised on the hilltop, confidently gazing ahead at a debt free future.
Alan Greenspan was aghast at the prospect. In most remarkable testimony before the Senate Budget Committee that morning, the chairman of the Federal Reserve System talked nonsense: immediate tax cuts were vital to avoid future tax cuts. Unfunded wars and further tax cuts followed. Instead of the national debt disappearing by 2008, Greenspan oversaw a doubling. His mismanagement is the genesis of today’s bedlam in the House of Representatives roiled by rump tea partiers dictating from the back bench. Editors at the Financial Times lamented his failures. But unlike former GE CEO Jack Welch who recanted his early advocacy of shareholder capitalism, Greenspan shrugs, disinclined to apologize for the worse fiscal flummox in American history.
Tea partiers have petulantly shut down government and threatened US debt default, dampening hopes for robust global recovery. US growth has been slow to rekindle as well: Obama’s second stimulus was rejected, public investment and R&D is savaged by sequestration, and tax revenue is capped while foreign tax havens bulge and carried interest is incongruously categorized as capital gains. The private sector offers little help, with weak investment and GDP growth to persist if one believes the future productivity growth trends of 1 percent or so forecasted by Robert J. Gordon in his 2012 NBER paper.
America thrives on challenges. And it faces considerable economic challenges posed by weak corporate governance detailed in What Went Wrong and in this Journal. Yet, they have become outweighed by the political challenges posed by the muscular and rebellious enthusiasm of Congressional tea partiers empowered on that January day.