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Reagan Proved Deficits Don't Matter*

April 29, 2011

"Reagan," Vice President Dick Cheney famously declared in 2002, "proved deficits don't matter." Unless, that is, a Democrat is in the White House. After all, while Ronald Reagan tripled the national debt and George W. Bush doubled it again, each Republican was rewarded with a second term in office. But as the Gallup polling data show, concern over the federal deficit hasn't been this high since Democratic budget balancer Bill Clinton was in office. All of which suggest the Republicans' born-again disdain for deficits ranks among the greatest - and most successful - political double-standards in recent memory.
The triumph of the GOP messaging machine is reflected in a new Washington Post/Pew Research poll. In just the four months since the Republican majority took control of the House, the percentage of Americans believing the budget deficit is a major problem which must be addressed now catapulted from 70% to 81%. But even more revealing is an April Gallup survey which showed the deficit (17%) rivaling the unemployment (19%) and the overall state of the economy (26%). And as it turns out, those cyclical swings in budget angst reflect the complete victory of the conservative deficit narrative.

As predicted at the time, Reagan's massive $749 billion supply-side tax cuts in 1981 quickly produced even more massive annual budget deficits. Combined with his rapid increase in defense spending, Reagan delivered not the balanced budgets he promised, but record-settings deficits. Ultimately, Reagan was forced to repeatedly raised taxes to avert financial catastrophe, including the last major bipartisan tax code overhaul in 1986. By the time he left office in 1989, Ronald Reagan nonetheless more than equaled the entire debt burden produced by the previous 200 years of American history. It's no wonder the Gipper cited the skyrocketing deficits he bequeathed to America as perhaps his greatest regret.
Of course, President George H.W. Bush would come to lament them even more. Despite his legendary 1988 campaign pledge of "read my lips - no new taxes," Bush the Elder just two years later was forced to break his promise. As PBS recounted:

This "could mean a one term Presidency," he confided to his diary, "but it's that important for the country."

Bush 41 was right on both counts.
For his part, Bill Clinton faced a double-whammy on the deficit issue. He was, after all, a Democrat. And in 1992 and again in 1996, Clinton was confronted with the third party candidacy -and the pie charts - of Ross Perot. But when President Clinton proposed boosting the top tax rate to 39.6% to help close the yawning Reagan/Bush budget gaps, every single Republican in the House and Senate voted no. While then Rep. John Kasich (R-OH) told Clinton and the Democrats, "your economic program is a job killer," Dick Armey looked into his crystal ball to claim:

"Clearly this is a job killer in the short run. The revenues forecast for this budget will not materialize; the costs of this budget will be greater than what is forecast. The deficit will be worse, and it is not a good omen for the American economy."

Most dramatic of all was Texas Senator Phil Gramm. The same man who led the 1990's crusade to gut regulation of Wall Street and the IRS and later called America a "nation of whiners," boldly - and wrongly - predicted:

"I believe hundreds of thousands of people are going to lose their jobs...I believe Bill Clinton will be one of those people."

As it turned out, not so much. In 1996, Bill Clinton buried Bob Dole. Then in his second term, he buried the budget deficit as well.
Then came George W. Bush, who promised in his 2001 message to Congress:

At the end of those 10 years, we will have paid down all the debt that is available to retire. That is more debt repaid more quickly than has ever been repaid by any nation at any time in history.

Instead, President Bush produced red ink as far as the eye can see. After inheriting a federal budget in the black and CBO forecast of a $5.6 trillion surplus over 10 years, President George W. Bush quickly set about dismantling the progress made under Bill Clinton. Even with two unfunded wars and the similarly unpaid Medicare prescription drug benefit, Bush's $1.4 trillion tax cut in 2001, followed by a $550 billion second round in 2003, accounted for half of the yawning budget deficits he produced. As the Center on Budget and Policy Priorities explained, if made permanent those Bush tax cuts if made permanent, would add more to the national debt over the next decade than the impact of Iraq, Afghanistan, the recession, the stimulus and TARP - combined.
During his presidency, Republicans in Congress voted seven times to raise the debt ceiling, the last to $11.3 trillion. By the time George W. Bush ambled out of the White House, he left his successor a $1.2 trillion budget deficit for 2009.
Barack Obama inherited two wars, a doubled national debt, and that $1.2 trillion deficit from George W. Bush. (As Orrin Hatch described the Bush years, "it was standard practice not to pay for things.") But one thing was new: Republican concern about the budget deficit.

"President Obama's agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying," the New York Times' David Leonhardt explained in 2009, adding, "The economic growth under George W. Bush did not generate nearly enough tax revenue to pay for his agenda, which included tax cuts, the Iraq war, and Medicare prescription drug coverage." That fall, former Reagan Treasury official Bruce Bartlett offered just that kind of honesty to the born again deficit virgins of his Republican Party. Noting that the FY2009 deficit of $1.4 trillion was solely due to lower tax revenues and not increased spending, Bartlett concluded:

"I think there are grounds on which to criticize the Obama administration's anti-recession actions. But spending too much is not one of them. Indeed, based on this analysis, it is pretty obvious that spending - real spending on things like public works - has been grossly inadequate. The idea that Reagan-style tax cuts would have done anything is just nuts."

Which is exactly right. Thanks to the steep recession, as the Congressional Budget Office (CBO) and others have documented time and again, the overall federal tax burden as a percentage of GDP is now below 15%, "levels that low have not been seen since 1950." And as Jonathan Cohn and Paul Krugman each explained, it is not a mythical Obama "spending binge" but the drastic loss of revenue combined with automatic increases in mandated safety net outlays that is producing the current budget gaps.
Nevertheless, only now - with Democrat Barack Obama in the Oval Office - Republicans like John Boehner warn Americans that "unsustainable debt and deficits threaten the prosperity of our children." But despite their fear-mongering, the GOP would make the situation much, much worse. December's two year tax cut compromise will add $800 billion to the deficits this year and next. And by making the Bush tax cuts permanent and lowering the top rate to 25%, the Ryan budget just passed by the House would drain over $4 trillion from the U.S. Treasury.
Back in June, Rhode Island Democratic Senator Sheldon Whitehouse lamented the double-standard at work in the Republicans' posturing on the national debt:

"I understand the point about the debt and the deficit and the spending," said Sen. Sheldon Whitehouse (D-R.I.). "But to me, that doesn't have an enormous amount of credibility, because when President Clinton left office, he left an annual surplus... At the end of [George W. Bush's] term, we had $9 trillion in debt."
"We would have none of this if it hadn't been for the Republican debt orgy that they went through," Whitehouse said.

Apparently, Sheldon Whitehouse and his Democratic allies don't understand how this game works. As Cheney said, "Reagan proved deficits don't matter."
Unless, of course, a Democrat is in the White House.

One comment on “Reagan Proved Deficits Don't Matter*”

  1. This political wrangling along party lines is absolutely ridiculous and PROVES virtually all politicians and most economists do not know what the fuck they are talking about.. The United States government is monetarily sovereign and has been since 1971. Deficit spending does not matter in fact it is part of the two key equations of economics:
    Federal Deficits – Net Imports = Net Private Savings
    Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports
    Three economic truths: Federal deficit spending is necessary for economic growth; all money is debt; federal taxes do not pay for federal spending.
    For you and me, running a financial deficit is bad. Deficits can deplete our personal money supply, reducing our ability to pay bills. Similarly, when a corporation or a city, county or state runs a financial deficit, their ability to pay bills is reduced.
    However, despite what the media, the politicians and the economists tell you, when the U.S. government runs a deficit, that is good – in fact, necessary.
    By definition, a large economy has more money than does a small economy. So, a growing economy must have a growing supply of money. Federal deficit spending is the way the government adds growth money to the economy. Because the federal government has the unlimited power to create money, it never can run short of money to pay its bills.
    Every form of money is a form of debt. Bank savings accounts, checking accounts, money market accounts, CDs, travelers’ checks, corporate bonds and T-bills all are types of debt and money. Even the dollar bill is a debt of the federal government, which is why it has “federal reserve note” printed on it. “Bill” and “note” are words describing debt.
    As debt and money are identical, a growing economy must have a growing supply of debt. It can be personal debt, corporate debt, city, county and state debt, and it can be federal debt. All debts, except federal debt, are limited by the debtor’s ability of pay, and excessive debt can lead to bankruptcy. This makes federal debt the safest form of debt. It can grow endlessly, without causing bankruptcy.
    One counter-argument is that foreign countries (especially China) will refuse to lend us money. But, we don’t need to borrow from China or from anywhere else. We borrow by creating T-securities out of thin air, then selling them. This process is a relic of the gold standard days, when the government did not have the unlimited ability to create money. Today, the government does not need to create and sell T-securities. It merely can create money, also out of thin air. The processes are functionally identical. The end of federal borrowing would end concerns about federal debt. Rather than discuss “debt” we would discuss “money created.”
    A second counter argument is that printing money causes inflation. Examples are given of pre-war Germany, China and Brazil, which suffered hyper-inflation, a different process. Hyper-inflation occurs if a government prints money in response to inflation, when the proper response is to raise interest rates. Since WWII inflation has not been caused by excessive money printing, but rather by excessive oil prices. The largest, recent inflationary period came during the modest Carter deficits. The massive Reagan deficits saw inflation decline. Making money more valuable by raising interest rates, prevents and cures inflation.
    The media tell us the federal government spends “taxpayers’ money” or “our grandchildren’s money.” Neither is true. Other governments – city, county and state — do not have the unlimited ability to create money, so they spend taxpayers’ money. The federal government does not. There is no historical relationship between federal deficits and tax rates. The federal government literally destroys incoming tax money, and creates new money to pay its bills. There is no federal “bill-paying” account funded by taxes.
    Federal debt has increased 1400% in just the past 30 years, and the government never has had any difficulty paying its bills. Were taxes to fall to $0, this would not affect by even one penny, the government’s ability to pay its bills.
    In summary, much of what the media, the politicians and the economists tell you about our economy either is obsolete or always has been wrong. The lack of understanding that federal deficits are different from all other deficits has prevented universal health care and improvements in education, pension support, the ecology, the infrastructure, energy, the military and numerous other situations.
    The misguided fear of inflation or taxes, neither of which is exacerbated by federal deficit spending, has paralyzed our ability to solve the most pressing problems of today. key equations of economics.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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