SUNDAY, MAY 21, 2017 09:00 AM PDT
Debt isn’t a big problem and it’s not caused by social spending — and Republicans aren’t better economic managers
In mid-March, President Donald Trump’s “skinny budget” proposal drew widespread criticism for its short-sightedness,senseless cruelty and betrayal of his base. It was bad for science, education, the environment and public health, and even for Norman Rockwell-style popular programs like Meals on Wheels. Congressional Republicans freely criticized it immediately, despite its red-meat military spending hikes. “These increases in defense come at the expense of national security,” said renowned hawk Sen. Lindsey Graham, R-S.C., referring to Trump’s proposed deep cuts to diplomatic and foreign aid programs. But in early May, the budget deal to keep the government open was a clear victory for Democrats, leading Trump to call for a government shutdown in frustration.
That’s hardly the end of the budget fight, though. Both Trump and congressional Republicans are preparing to do it all over again, despite how unpopular the first go-round was, and despite how damaged they are politically by the widening Trump-Russia scandal. Which is why it makes sense to take a step back and look at some of the big-picture lies shared by all Republicans — and far too many Democrats as well.
Three of these in particular completely disorient any attempt at sane, sensible budget discussions: First, the idea that the debt is a huge problem and should form a framework for budgetary decision-making. Second, that the debt is due to social spending, mostly on the welfare state. Third, that Republicans are “more responsible” and “better managers” than Democrats. For Democrats and progressives to win this fight — both short-term and long-term — they will have to take on these big lies. Let’s examine each of them in turn.
The idea of the federal debt as a huge problem has a very long history. Andrew Jackson was the only president to ever get rid of the debt — which he hated especially because of his own personal experience — but that lasted less than two years. The dominant rhetoric — echoed by President Barack Obama in 2011 — is to see national debt as household debt writ large, reflected in the title of his weekly radio address on Feb. 12 of that year, “It’s Time Washington Acted as Responsibly as Our Families Do.”
Obama framed his address in terms of a story told to him in a letter from a woman named Brenda Breece, a special-ed teacher in Missouri whose husband had to take early retirement after nearly four decades working at a local Chrysler plant. They had to scrimp and save, but that’s not all. “Like so many families, they are sacrificing what they don’t need so they can afford what really matters,” putting their daughter through college, Obama said. Then he continued:
Families across this country understand what it takes to manage a budget. They understand what it takes to make ends meet without forgoing important investments like education. Well, it’s time Washington acted as responsibly as our families do. And on Monday, I’m proposing a new budget that will help us live within our means while investing in our future.
My budget freezes annual domestic spending for the next five years — even on programs I care deeply about — which will reduce the deficit by more than $400 billion over the next decade.
At Washington Monthly’s blog, Steven Benen said it showed “how to use the wrong comparison the right way,” since Republicans were bound to invoke that very same “family budget” metaphor, but without the emphasis on investing in the future. It was a valid point, of course, and surely reflected how Obama himself must have felt. But that’s really only a defensive parry, and fundamentally at odds with the sweeping promise of “hope and change” on which Obama was elected in 2008. Benen passed over that, but he did point out how fundamentally wrong this rhetoric was:
The line has a certain intuitive charm that much of the public likes, which masks how wrong it is — the government needs to step up even more to keep the economy going when families and businesses pull back. It’s how FDR and Democrats ended the Great Depression in the 1930s, and how Obama and Dems prevented a sequel in 2009.
The need for government to spend more when private spending falters is one of the most basic insights of macroeconomics. It goes to heart of why macroeconomics and microeconomics are different fields, each with its own logic. How whole economies work differs from how individual economic entities do, just as team performance differs from individual performance in any team sport.
The insight — long neglected — dates back to Bernard Mandeville’s controversial 1714 book, “The Fable of the Bees: or, Private Vices, Public Benefits.” Thrift might be individually virtuous, Mandeville argued, but general prosperity was increased by expenditure rather than by saving. It was actually a difficult struggle for Franklin D. Roosevelt to realize this. A brief summary page from the FDR library tells the tale: “FDR: From Budget Balancer to Keynesian.” Roosevelt started out as a conventional thinker, in basic economics:
Roosevelt believed that a balanced budget was important to instill confidence in consumers, business, and the markets, which would thus encourage investment and economic expansion. As the economy recovered, tax revenues would increase making budget balancing even easier. This traditional view that deficits were bad was also supported by public opinion polls.
But these beliefs simply didn’t match the dire conditions of the times. So for years Roosevelt maintained his fundamental belief, bracketing it with the recognition that he faced an extraordinary situation:
From 1933 to 1937, FDR maintained his belief in a balanced budget, but recognized the need for increased government expenditures to put people back to work. Each year, FDR submitted a budget for general expenditures that anticipated a balanced budget, with the exception of government expenditures for relief and work programs.
All through this time, Roosevelt assumed that once the emergency had passed, things would return to normal, the extraordinary measures would be put away and a balanced budget would return. He argued passionately for the basic human decency of the path he embarked on, in a speech during his 1936 re-election campaign:
To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. To do so we should either have had to make a capital levy that would have been confiscatory, or we should have had to set our face against human suffering with callous indifference. When Americans suffered, we refused to pass by on the other side. Humanity came first.
It was only after that, however, that Roosevelt had his own rude awakening. In 1937, he did as he had always promised, based on how much things had improved:
From 1933 to 1937, unemployment had been reduced from 25% to 14% — still a large percentage, but a vast improvement. FDR’s reaction was to turn back to the fiscal orthodoxy of the time, and he began to reduce emergency relief and public works spending in an effort to truly balance the budget.
The result was a renewed economic plunge — the recession of 1937-8. It was only in response to this unexpected turn of events that FDR finally adjusted his fundamental frame of reference. Some of his advisers still pushed for the conventional balanced-budget approach, but others accepted the theories of John Maynard Keynes, who argued that “permanent budget deficits or other measures (such as redistribution of income away from the wealthy)” were necessary “to stimulate consumption of goods and to maintain full employment.” Consequently, it was “the reduction of federal spending that these advisers viewed as the cause of the recession,” and FDR came to agree. In is 1938 annual message to Congress, he defended his decision, noting how self-contradictory his critics were:
We have heard much about a balanced budget, and it is interesting to note that many of those who have pleaded for a balanced budget as the sole need now come to me to plead for additional government expenditures at the expense of unbalancing the budget.
With the onset of World War II, opposition to deficit spending vanished, and full employment ensued. By the end of the war, public views had changed as a result:
The obvious connection between deficit spending and economic expansion was not lost on many Americans, including business leaders who much preferred large deficits to Keynes’s alternative of massive redistribution of wealth through taxation as a way to sustain America’s prosperity in peacetime.
Four decades later, Reaganomics would represent a perverse twist of this realization. Despite lip service to the contrary, Reagan produced record deficits to sustain prosperity while dramatically concentrating wealth. Although Reagan claimed he would magically balance the budget in four years, he actually did quite the opposite. From Harry Truman through Jimmy Carter, every presidential term but one — the Nixon/Ford term from 1973 to 1977 — had seen the debt shrink as a percentage of GDP. It fell from a peak of 117.5 percent during World War II to to 32.5 percent by the time Reagan took office, and has never been anywhere near that low since. It jumped more than 20 percent during Reagan’s two terms, and Bill Clinton has been the only subsequent president to reduce the debt-to-GDP ratio.
But let’s not lose sight of what Roosevelt accomplished, in creating the foundations for America’s broad middle class, which had never existed before on such a scale:
FDR’s support for deficit spending was yet another shift in the relationship between the government and the people that took place during his Administration. President Roosevelt expressed his vision for a country where each citizen was guaranteed a basic level of economic security most eloquently in his Economic Bill of Rights speech on January 11, 1944:
“We have come to a clear realization of the fact that true individual freedom cannot exist without economic security and independence. ‘Necessitous men are not free men.’ People who are hungry and out of a job are the stuff of which dictatorships are made.”
These were the hard-won lessons of the Great Depression and World War II, but as so often happens in history, those who did not live through that suffering only learned the lessons second-hand, and never knew them in their bones. So we lost our way again, which is why we got Reagan in the 1980s and now have Donald Trump. We need to remember what made the American middle class great in the first place: a commitment to activist government spending money on public needs when the private sector fell short. Short-term debt-obsession was the enemy of everything Roosevelt accomplished — not a guide to sound economics.
Now for the second big lie, that the debt is primarily due to welfare-state social spending. Here I’d like to quote myself from 2011 (“Enshrining the lies of the US’ 1%“):
Indeed, as Thomas Ferguson and Robert Johnson explained just over a year ago, in their paper “A World Upside Down? Deficit Fantasies in the Great Recession”, all of the US long-term federal debt is due to just three oligopoly sectors: the military-industrial complex (the backbone of empire, with bases all around the world and almost half the world’s military spending), the medical-industrial complex (with twice the per capita costs of other systems), and the financial sector (which has recently cost trillions of dollars in lost wealth and economic activity).
All three of these are enormous cash cows for the one per cent, and equally enormous cost-centres for the 99 per cent. Without the costs imposed by lack of competition, regulation and accountability in these sectors, the US would have no long-term debt problem. We would be paying it down, rather than running it up.
In that paper’s abstract, the authors write:
In an era of unbridled money politics, concentrated interests in the military, financial, and medical industries pose much more significant dangers to U.S. public finances than concerns about overreach from broad based popular programs like Social Security, which is itself in good shape for as many years as one can make credible forecasts.
Concerns about Social Security are vastly overblown, they note, and uncertain worries about two decades from now should not dominate our attention. Medicare is another matter, only because the American health care system as a whole is so expensive. They drew on an analysis by Dean Baker, which compared projected health care costs in the U.S. with projections based on the cost structures of other countries.
The U.S. spends a far higher percentage of its GDP on health care than any other country. It also gets less health for it than any other major country, in the sense other countries do just as well or better on most health indicators, though they spend much less.
Why is no mystery, despite all the sound and fury of the health care “debate.” The U.S. health care system is in no sense a competitive marketplace. Instead, it is a chain of private oligopolies connected to each other by streams of payments administered by a vast, non-competitive private insurance network and the federal government. Producers and insurers together dominate government policymaking, at both federal and most state levels.
The rate of cost increase has been reduced under the ACA since the paper was written, but we’re still far from universal coverage, and the problems of oligopoly remain — most notably in the way insurers have withdrawn from some marketplaces. The failure to even include a public option in the ACA left insurers in positions of tremendous coercive power. And GOP repeal plans could wipe out all the ACA gains and leave us facing a grim future.
The military-industrial complex, the authors note, is commonly taken to make up about 20 percent of the budget, but if we include all related functions — homeland security and intelligence agencies, plus significant parts of other departments, including Energy, Transportation and State — with the military share of the debt, that total nearly doubles: “One careful effort at a more comprehensive reckoning suggests that perhaps 39% of the proposed Fiscal Year 2011 budget goes toward defense.”
Finally, there’s the enormous costs inflicted by the financial meltdown of 2008, triggering the Great Recession, and the high probability of future such disasters. These costs are obviously more difficult to assess than the excessive costs of the U.S. health care system. But they are certainly much greater than the amounts involved in the Social Security system, much less Meals on Wheels.
This sort of realistic appraisal is not a popular perspective among political elites, who are largely funded by the oligopolies involved. But it is popular with the public — see Bernie Sanders’ approval ratings as one indication. Yet, these major sources of long-term debt pressure never seem to enter the deficit-cutting debate.
Now for the third big lie, the claim that Republicans are “more responsible” and “better managers” than Democrats are, an assumption that permeates the air whenever the economy is discussed. I’ve already referred to the fact that Republican presidents since Reagan have been terrible at managing debt reduction, but the point at issue is a broader, more fundamental one: There is no aspect of economic management where Republicans do as well as Democrats. None whatsoever. Here, the best single source is a slim volume, “They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010“ by Eric Zuesse. As explained in the publishers’ synopsis:
The Democratic and Republican Parties are virtual opposites of each other in their economic records, going back to the earliest period for which economic data were available, around 1910. More than a dozen studies have been done comparing economic growth, unemployment, average length of unemployment, stock market performance, inflation, federal debt, and other economic indicators, during Democratic and Republican presidencies and congresses, and they all show stunningly better performance when Democrats are in power, than when Republicans are. These studies are all available online, and they are all summarized and discussed in this path-breaking book, which settles, once and for all, the question of whether there’s any significant economic difference between the two Parties. Not only is there a difference, but — shockingly — it always runs in favor of Democrats in power.
Democrats are superior for the economy as a whole — GDP growth, unemployment rate, inflation — for the stock market, and for controlling government deficits too. One example Zuesse cites is from Kevin Drum, back in September 2002. Responding to a story in Slate reporting that “since 1900, Democratic presidents have produced a 12.3 percent annual total return on the S&P 500, but Republicans only an 8 percent return,” Drum wrote:
This is actually an old story, and Slate doesn’t know the half of it: Democratic administrations, it turns out, manage virtually every facet of the economy better than Republicans.
Drum analyzed the three main statistics cited above — GDP growth, unemployment and inflation — from 1948 to 2001, and included a time-lag. “In the same way that a pitcher is responsible for runners left on base even after he’s been replaced,” he wrote, “presidents should be responsible for a few years of economic performance after they leave office.” Choosing a variety of time-lags, the results were all the same:
|3 Yrs||4 Yrs||5 Yrs|
No matter what time-lag you choose, Democrats post higher GDP growth, lower unemployment, and lower inflation.
This is just one of multiple examples, and the value of Zuesse’s book is that it brings them together. “The myth that conservatives are better for the economy than are progressives, is driven not by the masses but by the elite, the insiders who benefit from this deception,” he writes. But even that’s a dubious proposition sometimes, when — as under George W. Bush — things really go off the rails.
Whatever happens in the months ahead, whatever specific gambits the Republicans trot out, it will always serve us well to keep in mind these three big lies, and remind others why and how they are so wrong: Debt is not a dominant economic problem and should not frame our budgetary decision-making; debt is not primarily due to social spending; and Republicans are not “more responsible” or “better managers” of the economy than Democrats. Take down the big lies, and the little ones will fall apart much more easily.