Stephen Pizzo on www.tompaine.com: "Had the Clinton policies remained in force the economy would now have $5.6 trillion in surplus revenues available to address such pressing issues as Medicare and Social Security reform—not to mention the war. Instead, the first thing the new Bush administration did when it took office was to blow the entire projected Clinton surplus on tax cuts. Then, suddenly short of cash, (duh!) it dusted off the national platinum credit card and ever since has been saying, "just charge it." Between 1998 and 2001 we were able to pay down the national debt by $453 billion. Since then the debt has increased steadily once again. The total national debt now stands just a shade under $7 trillion and is growing at a rate of $23,765.00 a second."
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The Grinch That Stole The Recovery
Stephen Pizzo is a financial journalist who lives in
Sebastapol, California.
Let's say you have these neighbors who, once
reasonably affluent, fell on hard times. Just a few
years ago they were able to earn enough to buy
anything they needed. In fact, just before misfortune
arrived, they had been reducing their earlier debts
with money left over after paying current expenses.
But the last three years have been tough for the
family. Work has been scarce and their budget tight.
Their yard went to seed as they had no money for
upkeep and the house was beginning to look shabby. It
was a sad thing to witness.
But in recent weeks the family appears to have
experienced a miraculous recovery. A new Hummer and a
boat appeared in their driveway, the gardeners are
back at work and the house is getting a fresh coat of
paint. And there are plans for a new addition as well.
If the family's fortunes had genuinely turned around,
we could all be relieved and happy for them. But in
reality nothing fundamental has changed in their
lives. Instead, tired of being depressed, they decided
to jump-start their lifestyle by going deep into debt.
They refinanced their home pulling out all the equity
they had accumulated over the past 20 years. They
maxed out dozens of credit cards and took out as many
personal loans as they could convince bankers to
extend.
This enormous and sudden infusion of credit-generated
cash fueled what, to the casual observer, appeared to
be a robust personal recovery for the once-struggling
family.
Meet the Bush family, 1600 Pennsylvania Ave,
Washington, D.C.
In recent weeks the Bush administration has been
crowing about what appears to be a sudden a dramatic
economic turnaround. The numbers are indeed
impressive: Gross Domestic Product (GDP) last quarter
up an astonishing 8.2 percent (from 3.3 percent the
previous quarter,); jobless claims falling for the
first time in a couple of years and consumer
confidence heading finally heading north.
I hate to be the Grinch that steals the joy of
recovery, but it's important we understand exactly
what it is that has created this sudden burst in
economic activity and where it is probably taking us.
According to the nonpartisan Congressional Budget
Office, the Bush administration's tax cuts and
spending proposals of the past three years ring up at
a bill of $2.7 trillion, adding an additional $1.8
trillion to the federal deficit over the next 10
years. (The actual size of the deficit is being
obscured by dipping (with both hands) into the $2.6
trillion Social Security trust fund. If that money
were placed out of reach, the deficit would actually
be $4.4 trillion through 2013.) The last time the
nation experienced this kind of fiscal stimulus was
under Ronald Reagan, who cut taxes by $750 billion,
($1.1 trillion in today's dollars.)
That first experiment in supply-side economics ended
with Reagan's successor, George H. Bush, breaking his
"no new taxes" campaign promise. He was forced to
raise taxes, not by Democrats, as revisionist
supply-side Republicans like to claim, but by
undeniable and pressing reality.
Though it cost him re-election, father Bush did the
right thing. Reagan's tax cuts—coupled with breakneck
defense spending—had created an illusion of economic
recovery. That illusion was unmasked when predicted
growth in tax revenues failed to materialize and the
deficit exploded. By the time Reagan left office in
1989 he had added another $2.1 trillion to the federal
deficit. (The money supply-siders predicted would
trickle down never made it, preferring to remain
pooled someplace near the top.)
When Bill Clinton came to office, he cut spending and
raised taxes, and by the time he left office had
created the first budget surplus since the Eisenhower
administration. Contrary to all supply-side theory and
predictions, business boomed and new tax revenues
flooded the Treasury.
Had the Clinton policies remained in force the economy
would now have $5.6 trillion in surplus revenues
available to address such pressing issues as Medicare
and Social Security reform—not to mention the war.
Instead, the first thing the new Bush administration
did when it took office was to blow the entire
projected Clinton surplus on tax cuts. Then, suddenly
short of cash, (duh!) it dusted off the national
platinum credit card and ever since has been saying,
"just charge it." Between 1998 and 2001 we were able
to pay down the national debt by $453 billion. Since
then the debt has increased steadily once again. The
total national debt now stands just a shade under $7
trillion and is growing at a rate of $23,765.00 a
second. At last count every family in the United
States is already on the hook for around $110,000—and
that tab is still running. But should we care? There's
no shortage of supply-side economists willing to
assure us (once again) that deficits don't really
matter. And, they say that those of us who insist on
applying household or business economic disciplines to
the national economy are simply proving ourselves to
be rank amateurs.
"I hate to be the Grinch that steals the joy of
recovery but it's important we understand exactly what
it is that has created this sudden burst in economic
activity and where it is probably taking us."
Of course, there are other economists who will tell
you that, while a nation certainly does has more ways
of delaying the inevitable—ways that are not available
to individuals or private businesses, like printing
money—that each of those stalling tactics generates
its own eventual downdraft.
The biggest of those downdrafts is the mushrooming
deficit. While spending huge sums of borrowed money
quickly will inevitably spark business activity as the
money is consumed, it does nothing to change the
underlying fundamentals in the marketplace. Once all
that high-test fuel is consumed the economic engine
will return to a rough idle—and a lot worse for wear.
Then the bill for that joy ride arrives—just as it did
at the end of the Reagan years, and it must be paid.
When we don't have cash on hand we pay our national
debts by selling bonds. These low-risk,
government-backed securities compete head to head with
private businesses that must borrow money and sell
bonds too. While at least private borrowing can create
jobs and new wealth, government borrowing creates
nothing.
Worse yet, a flood of government bonds inevitably puts
upward pressure on the cost of money across the board.
Banks must offer higher interest rates, to keep savers
from bolting to bonds. In the end the burn lands
directly where it's least needed—on businesses and
consumers. To cover the cost of paying depositors
higher rates banks raise the interest rates they
charge on home, auto and business loans. The higher
cost of money to businesses is passed directly onto
consumers in higher prices for products and services.
What I just wrote is hardly news, but right out of a
first-year Econ 101 text. One would think that, of all
people, pro-business Republicans would get it. But
apparently they don't. Or maybe they just don't care.
If the Bush administration's tax cuts and deficit
spending can create a short-term recovery, and they
can keep that hot air balloon afloat until next
November, they may figure it can get them another four
years in the White House and in control of Congress.
With some luck Bush may even be able to ride this
deficit balloon through most of a second term. Then he
can just leave the tab on the table for the next
occupant of the White House—the same way Ronald Reagan
did. And then finally, the supply-side spin-doctors
will, as they still do with Reagan, declare George W.
Bush's tax cutting strategy a resounding success and
go back to complaining the dangers posed by those "tax
and spend liberals."
It's hard to predict when this deficit balloon will
run out of lift. The only certainty is that it will.
History is definitive on that point.
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Published: Dec 05 2003