If you were born in 1961, you missed The Great Depression, World War II and The Fifties. You were 3 years old when Congress passed the Gulf of Tonkin resolution. (“What’s that?” you ask. The act of war that authorized American troops into Vietnam.) and 13 when they left.
When you turned 21, Ronald Reagan was president. Interest rates were 17 percent. Unemployment was 10.8 percent. And the average personal income of every American was $11,731 a year––compared with $38,611 today.
If you were born in 1961, you also are the same age as President Obama.
For most of your adult life, your well-being was shaped by the economic policies of two Bushes and a Clinton. You experienced rapid salary increases (to keep up with inflation) in the 80’s that gave you money to buy all kinds of stuff you didn’t need, much of it manufactured overseas, often by American companies, using cheap labor that would eventually take your job.
A technology boom in the 90’s fueled your productivity and made a whole slew of you Internet millionaires. The Bush tax cuts in 2001 and 2003 were icing on the cake. Even if you didn’t like Bush, or thought his invasion of Iraq was cuckoo, you benefited from the lowest tax rates since the 1940’s. Even as the government expanded business incentives and government services––and, ahem, poured a trillion dollars into Iraq and Afghanistan like it was shooting paper out of confetti cannons––no one had to pay.
Until two years ago. Then the economy turned upside down, and the dark underbelly this whale of a joy ride came to the surface. Now, as David Stockman wrote last Sunday in a New York Times op-ed piece, “The day of national reckoning has arrived.”
A Republican Perspective: It’s the Republicans’ Fault
Stockman, who is 15 years older than Obama, knows whereof he speaks. He was Reagan’s first budget director in the early 80’s, a conservative of the old school who wanted to cut both taxes and spending – and later became disenchanted with how the Reagan revolution was playing out.
He argues that today’s economic malaise is the result of four “deformations”––all created by Republicans––that presaged our current predicament.
- The first was President Nixon’s decision in 1971 to untie U.S. currency from the gold standard, allowing the federal government to issue paper dollars in lieu of gold. Instead of drawing down our gold reserves (and reigning in our economy) to cover trade imbalances, we shuffled paper money, “floating” our currency on a Milton Friedman-like free market, to cover our current $8 trillion trade deficit. And now we are paying the price.
- The second was the Republican party’s embrace of “the insidious doctrine that deficits don’t matter if they result from tax cuts.” After Reagan introduced his tax and spending cuts in 1981, congressional Republicans “exempted from the knife most of the domestic budget – entitlements, farm subsidies, education and water projects” and plowed more money into defense spending. (Remember Star Wars?) The stimulus worked in getting the economy moving, but never well enough to make up for the resulting deficits with new tax revenues.
- The third deformation came in the form of the Bush tax cuts, and they were doozies. In four short years, Bush turned a $1.6 trillion tax surplus he inherited from President Clinton into a $2.4 trillion debt. Then he really piled it on. By the time Bush left office in 2008, he had pushed federal revenues down to only 15 percent of the gross national product, lower than they had ever been since the 1940’s. At the same time, he signed into law $420 billion in non-defense appropriations for the coming year – 65 percent more than the $260 billion budget he inherited eight years before, and that doesn’t include the cost of the two wars he started in Afghanistan and Iraq, both unfunded by new tax revenues.
- Finally, Stockman wrote, the fourth deformation came when Republicans––“oblivious” to the danger of flooding the markets with inflationary dollars––removed traditional restrictions on leverage and speculation. Most of this money went into a global economy dominated by Wall Street banks and shadow-banks (hedge funds, investment houses, etc) who saw their own assets grow from $500 billion in 1970 to $30 trillion by September 2008.
“If there were such a thing as Chapter 11 for politicians, the unaffordable Bush tax cuts would amount to a bankruptcy filing,” he writes. “If honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015,” Stockman predicts the national debt will soon reach $18 trillion. “That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice.”
“It is not surprising,” he concludes, “that during the last bubble (from 2002 to 2006) the top one percent of Americans––paid mainly from the Wall Street casino–– received two-thirds of the gain in national income, while the bottom 90 percent––mainly dependent on Main Street’s shrinking economy––got only 12 percent. This growing wealth gap is not the market’s fault. It’s the decaying fruit of bad economic policy.”
As President Obama celebrates his 49th birthday this week, he has the unfortunate job of managing the hen house just as the chickens are coming home to roost. From an historical perspective, you can say Obama did no worse a job bringing down unemployment in his first two years than Reagan did in his. Reagan’s approach to stimulus ran along the Republican line of cutting taxes, while Obama’s, naturally enough, followed the Democratic approach of increased federal spending. But the result at this juncture of their respective terms was about the same: a mild, but unsatisfying rebound.
Long term, however, Stockman points out the down-the-road consequences under Reagan were disastrous; and, although the jury is still out on the benefits of Obama’s health care and financial reform, there’s still a chance for a better outcome under Obama.
The Fall Elections
Historical comparisons don’t account for much in elections. They never ever do. Obama can’t reach back into people’s memory of the hardships of the 30’s to remind voters that a depression a long time in the making takes a long time to recover from. Most of the electorate, like Obama, was born after 1961. In today’s 24/7 politics, their hardship has to be someone else’s fault.
In today’s political climate, a politician who can’t fix the economy in a single election cycle is a bad mechanic, no matter how much he protests his opponents have jammed the grease guns. Two years ago, George Bush was the target (not that he didn’t deserve it after eight years in office). Now it’s Barack Obama’s turn in the barrel. He’s the lightning rod in the fall Congressional races, and it’s hard to see a scenario where he won’t take a few hits.
In the off-year Congressional elections of 1982, Democrats gained 27 seats in the House and one in the Senate. Republicans are likely to do just as well in 2010. Maybe better, since many freshman Democrats were swept into office from normally Republican districts where many voters rode Obama’s “hopey-changy” mantra to express their disapproval of the whole Washington scene. But the decision on what comes next in the economic recovery remains even more firmly in Obama’s hands.
Job One: Let the Bush Tax Cuts Expire
Congress’s first order of business after the November elections is deciding whether to extend the Bush tax cuts – or let them expire. Obama campaigned on the promise he would roll back tax cuts for America’s wealthiest individuals making over $250,000. Mitch McConnell, the Senate Republican leader, claims that this amounts to “raising” taxes on the rich in a depression, hardly the best way to stimulate economic investment. Stockman counters that the increase – only 3% – back to the Clinton era rates is a small price to pay to get back on the road to balanced budgets.
Fareed Zakarias, the Newsweek columnist, is even more outspoken. In a piece titled “Raise My Taxes, Mr. President!” he writes: “The Bush tax cuts remain the single largest cause of America’s structural deficit––that is, the deficit not caused by the collapse in tax revenues when the economy goes into recession.” If the Bush cuts are allowed to expire, it will shrink the deficit by $300 billion immediately (roughly 30 percent) and still leave America with the lowest tax rate since the 1950’s.
“The simple fact is this: all the Bush tax cuts were unaffordable. They were an irresponsible act of hubris enacted during an economic boom,” he writes. “We have in front of us a simple, easy way to bring America’s fiscal house in order, reduce our dependence on foreign borrowing, restore U.S. credibility and power, and give us a stable revenue base from which to make key investments for future growth. All we need is for Congress to do what it does so well––nothing.”
The president’s hole card in the debate is the fact that extending the Bush cuts means passing a piece of legislation, and letting them expire requires no action at all. After watching Republicans force Democrats to find 60 votes in the Senate to pass anything, he can safely sit back and let them come to him for the 60 votes they will need to extend something as simple as an inflation-adjusted estate tax exemption.
It’s an interesting role reversal, and not only in the Senate dynamics. We may now see a Democratic president acting as a deficit-hawk, and his Republican counterparts in Congress claiming the roll back to a Clinton-era rate for rich people will hurt the recovery (even though the United States achieved its greatest economic growth in 30 years in the Clinton era.)
There’s something sort of recidivist about the new Congress waging its first battle next year over tax cuts versus deficits as a way to correct our wayward economy––a fight that’s been going on for 80 years.
It’s a brave new world out there. The economic landscape is vastly different from 1961. It is a global economy where China, India and the Middle East are players equally as important as Europe, Russia and the United States. As we now know, the financial underpinnings of the U.S. economy ––who’s lending to whom, to cover what deficits from which programs or wars––is far more complex than it was in 1961.
Frankly, I’m glad there’s somebody in charge with the energy to keep up with all the changes. But it’s comforting for an old guy to see that the more things change, the more they stay the same. Somebody has to pay.