750 Billion Reasons to Worry

I’m too much of a worry-wart to share David Brooks’ conclusion that this election is all over but the shouting, especially with  John McCain now squarely in the underdog role where he positively luxuriates.  And maybe more importantly, McCain has finally woken up and realized that for all his erratic attempts at fear mongering, by far the most monger-able variety is the prospect of an Obama/Pelosi/Reid triumverate and a filibuster-proof Senate majority.  Expect him to target the Speaker and the Leader tonight as vigorously as he does “That One” with whom he will share the stage.

But let’s say Obama wins, and his coattails are stretched to historic proportions by the weight of sagging asset values and and upside-down credit default swaps.  Fiscally, speaking, then what? 

As Brooks points out, Obama is likely to inherit a national debt of almost $11 trillion and a structural deficit–before bailouts, tax cuts, infrastructure investment, and other stimulus–of a mind-boggling $750 billion.  Recall that Bush inherited an economy on the verge of recession, but also a balanced budget.  In other words, “RED F-ING ALERT!!”

The United States has reached a level of deficit spending which is not just irresponsible but immoral, as well.  None of the noise about “bailouts with taxpayer money” groks the central point:  every penny of deficit spending in our society is a penny we borrow from another country and rely on our kids to pay back.  In bailing out/stimulating/infrastructuring/jobs programming,  It would be far more accurate to say one of two things:  (1) we are spending China’s money (which we borrow); or  (2) we are spending our our progeny’s money (which they will have to pay back).   Aside from the Constitutional requirement that interest on the debt is kept current, “spending taxpayers’ money” isn’t what’s happening.  China doesn’t pay taxes, at least not to Uncle Sam.  And neither do your kids–at least not yet.

Brooks anticipates a debate between liberals and moderates within the Democratic party over the size of the deficit.  Fair enough.  Obama can be mindful of that debate if he chooses, but the far more important dicourse  one that will be by necessity his creation:  the debate between the moderates and their children

The liberals simply don’t have a leg to stand on.  A deficit approaching $1 trillion–10% of the debt, for chissakes– must start to come down, period.   Increasing it simply is niether sane nor moral regardless of the phase of the business cycle, which nobody is going to repeal anytime soon.  And the well worn trope about the deficit being manageable as a proportion of GNP would only be relevant if there were some demonstrable intent to use the size of the economy as a lever to bring the size of the deficit down.  There has been none since Bob Rubin left town.

As sagacious as Rubin was in assuring that the spoils of the go-go 90s were applied toward deficit reduction, the guy who Obama, Ben Bernanke, and next Treasury  chief should be really be talking to is Paul Volcker.   Beginning in 1979, Volcker courageously tackled the scourge of the Great Inflation which had its seeds in the Great Society of LBJ and was assiduously cultivated by Nixon’s and Carter’s disastrous experimentation with wage and price controls.    Recounts the St. Louis Fed:

By reversing the misguided policies of his predecessors, Volcker set the table for the long economic expansions of the 1980s and 1990s.

How bad was the period of the Great Inflation? The inflation rate, a mere 1 percent in 1965, hit 14 percent by 1980. Unemployment trended up from a low of 3.5 percent (annual average) in 1969 to 9.7 percent in 1982. The stock market was in the dumps. Oil prices jumped off the charts. Presidents Richard Nixon and Jimmy Carter became desperate enough to tinker with price controls, the results being disastrous.

Volcker, in office only two months, took the radical step of switching Fed policy from targeting interest rates to targeting the money supply. The days of “easy credit” turned into the days of “very expensive credit.”   The prime lending rate exceeded 21 percent. Unemployment reached double digits in some months. The dollar depreciated significantly in world foreign exchange markets, Volcker’s tough medicine led to not one, but two, reccssions before prices finally stabilized.

Now that’s the courage of one’s convictions.  Although Phil Gramm stuck his foot deeply in his pie hole when he pronounced America “a nation of whiners,” he wasn’t without a point.  True, we’re on the verge of what may be a fairly severe recession, but the American people want relief NOW.  There should be no payback for two decades of excess–surely that was somebody else’s fault.  Can you imagine the Bush administration’s behavior had Bernanke run interest rates into the 20s and caused two recessions?  The CIA would have poisoned the Fed Chair in his sleep.

As much courage as Volcker and Reagan showed  on inflation, it pales in comparison with the resolve that will be required to square off against the deficit.   Economists agree that inflation is bad like oncologists agree that cancer is bad:  it taxes society both today and in the future.  Whereas super-tight money may not have been popular in some quarters, nobody could really argue that inflation needed to be reined in, and that an end to excessive price escalation would ultimately benefit the people who overwhelmingly pulled the lever for Ronald Reagan in 1984.  Of course, Reagan repaid his country by going on a second-term Keynesian spree the likes of which hadn’t been seen since the Great Society, but that’s another story.

No, deficits are not popular targets.  Dick Cheney’s quip to his hand picked-Treasury Secretary Paul O’Neill that “Reagan proved that deficits don’t matter” sort of sums up the problem.  Nobody ever got thrown out of office for running a big budget deficit.  But when Jimmy Carter suggested that we put on a sweater, we were ready to torch the White House.  Rule number one in politics:  “don’t blame the public.”  Rule number two:  “don’t ask for sacrifices.”

But here’s the thing:  deficits are the ultimate form of taxation without representation.  By shifting the burden of repayment from generation to generation, we guarantee that one day, America will no longer be an economic powerhouse and life will be significantly more difficult for our progeny.   It’s easy to forget that as late as Richard Nixon, it was an article of faith that America was and would remain a creditor nation.   No longer.  Unrestrained, deficits come as naturally to a retail democracy as does quacking to a duck.  As long as there is nobody to speak up for your progeny, the debt will do nothing but grow. 

That’s why in his first 100 days, it will be time for Barack Obama to speak up for your kids in an argument against, well, you.  It will take monumental leadership to say, “yes we may be in for some rocky economic times, potentially an elongated recession, but it is time to start bringing this sucker down.  There is always an excuse to wait until tomorrow to start.  Well, we’re starting today.”

The pressure on a new President not to do this will be vast and unrelenting, from political operatives certainly but also from much of the economic establishment.  The first test of Barack Obama’s courage will be whether he can chart is own, independent path.  Since we won’t speak up for our children, it will be up to the President of the United States.

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