Eight causes of the deficit "fiscal cliff." Which party is most responsible?

To many U.S. voters, one issue towers foremost -- the Fiscal Cliff of rising public debt. We appear to have come a long way since Vice President Dick Cheney famously said "deficits don't matter." Today, frightened by much-worse debt crises in Greece, Spain etc, Americans fret about floods of red ink that reached more than a trillion dollars a year under George W. Bush, and that have gone down only slightly under Barack Obama.

Wasn't it just a little while ago that we were paying down the debt, under Bill Clinton?  So rapidly that Alan Greenspan even worried that the U.S. treasury might cease issuing bonds, forcing down interest rates to dangerous levels?Even now, with interest rates at an all-time low, the actual cost of borrowing money is very small. For the U.S. that is. Our fundamentals are far better than Europe's, for the time being.  Nevertheless, everyone -- democrats and republicans alike -- admits that fixing the deficit has become urgent. 

And something will be done soon! If republicans and democrats cannot end gridlock with a compromise this December, the Bush Tax Cuts will automatically expire, triggering a sudden return to rates we saw during the Clinton era.  

Is that prospect so bad?  Weren't those good times? The resulting take -- calculated at 600 billion dollars -- would more than cut the current deficit in half.  And all we have to do is -- nothing.  Just let the Bush cuts expire.

Alas, having barely veered out of a genuine Depression and into deep recession, this is no time to reduce the velocity of money by hitting the spending power of the Middle Class. Some up-ratchets are needed, not hammering the middle class. 

== Getting better at last? ==

Worth noting: according to statistics released this week, the average American has finally paid down most of the excess private debt that he or she built up during the Bush years. This de-leveraging process has been hard and painful, especially during a depression-recession.  But Personal debt levels are now down to Clinton Era ratios. 

Combine that with rapidly rising consumer confidence, plus gradually improving employment, plus very fat company cash reserves, and you have a recipe for good things in 2013.  Whoever wins this election will claim credit.  But in truth, we all participated in digging ourselves out of this mess.

So, if citizens and the private sector can climb out of their deep debt hole, what will it take to de-leverage the biggest debtor of all?  The U.S. Federal government?

== Eight Major Causes of the U.S. National Deficit ==

First, we must (at last) calmly list the reasons why the U.S. went from Clintonian  surpluses to devastating hemorrhages in just a few years.  

Second, where possible, we must assign blame for the things that got us in this mess.  And if our list proves that one party was more responsible? Then it's our duty to give that party less credibility. Less opportunity to repeat the damage.  

So let's go after the reasons for the deficit, in approximate order of importance. 

1) Number one on our list is the tanked economy.  That plummet both steeply reduced tax revenues and sharply increased the number of Americans needing help to get across lean times.  There's a lot of blame hurled around.  But a few top culprits for the collapse stand out. And the first of these was bipartisan:

 An asset bubble popped, tipping the already wavering economy into a ditch. That asset bubble was largely tied to an overheated housing market, the mortgage industry, and Wall Street speculators who overheated both while creating a swamp of toxic derivatives to poison capital markets. We'll set aside the crimes of Wall Street and the CEO caste for #2.  But the housing/mortgage bubble was the work of both parties. 

Over-building and lax rules allowed millions of unqualified buyers to leverage themselves beyond their ability to pay. (It is the same thing that shredded the otherwise healthy Spanish economy.) Democrats were fully culpable in this topmost sin, because they saw it as a social program to get poor people into homes. And Republicans claimed to have the same generous motive! The core moment was George W. Bush's "Ownership Society" speech that then led to passage in the Republican-controlled House and Senate -- but with plenty of Democratic votes -- of bills loosening mortgage rules, for example letting FanniMae and Feddie Mac and Countrywide run wild. 

The good news?  That failure mode is over. The bubble burst.  Citizens -- even many who had sunk beneath underwater mortgages -- have by now largely dug their way out and housing is recovering toward its approximate real value.  

The bad news? This was a harsh blow and both parties took part. What made the bursting of the housing bubble especially gruesome, however, was the second whammy.

2) Criminal fraud and culpable failure of regulatory supervision over banking, Wall Street and wealth funds, allowing them to use other peoples' money in a casino of fevered gambling that became un-tethered from reality. The central example was conversion of dubious mortgages and other questionable bets into "securities" that became grotesquely toxic, amounting to trillions in losses. It was enough to transform a bad asset bubble into what could fairly be called the Second Depression. 

Top culprit: the removal of restraint from Wall Street and Banking gambling with depositors' funds by allowing merger of deposit and investment banking. Plus the crippling of regulatory agencies charged with checking fraud, plus the scandalous conflict of interest built into the bond rating agencies. And the redefining of securities to include phantoms made of hot air.  

As for blame? Some of the first deregulatory steps were taken by the Republican Congress during Bill Clinton's term as president, and Clinton went along, in trade for things he wanted -- a reluctant acceptance that he now says he regrets. But the full dismantling of regulatory oversight of Wall Street took place when the GOP controlled all three branches of government.   Even now, the GOP's top agenda item (other than "making sure Obama fails") is to prevent the Consumer Financial Protection Bureau from becoming fully functional. 

Together, items #1 and #2 (assisted by #3 below) dumped us into the Second Depression. That depression (since moderated into a deep-long Recession) devastated the economy and the resulting plummet in tax revenues became the biggest contributor to the deficit.

3) Tax "largesse" gifts to the aristocracy.  With tax rates  - especially on the rich - already near a 70 year low, the radical wing of the GOP took advantage of Bill Clinton's departure (he had been paying down the debt) to pass the Bush tax cuts.  In fairness, Clinton had not been doing the responsible thing all by himself.  A consortium of moderates from both parties had negotiated budget plans with Clinton that emphasized paying down debt during "fat years" so that we might be in good shape when, or if, lean years returned.  Radicals of the left and of the right railed against this, but the middle class, according to many polls, favored debt pay-down over grabbing the surplus as a temporary "largesse." 

But sensible, bourgeois prudence did not outlive the election of 2000, when the radical right controlled all three branches of government. They soon -- (even amid crisis and war) -- doubled down on the voodoo called "supply side" economics, a mythology proclaiming that -- (take a deep breath and hold on) -- money flowing into the pockets of the rich will immediately be invested in entrepreneurial new enterprises, into research and development and into the capital equipment needed by old businesses to deliver new products and services, resulting in skyrocketing business activity and a burst of prosperity that will then be taxable at the lower rates, erasing the loss to the treasury. 

(Okay, you can inhale now. But do compare this prediction to Cause Number 6, listed below.)  

Like most voodoo-cult incantations, there is barely a grain of truth. For one thing, the high marginal tax rates under FDR and Ike blatantly did not repress economic growth.  Indeed, the 1940s and 1950s and 1960s featured the most rapid rise of the middle class and new business startups and proportionate increase in prosperity in the history of our species, alongside the lowest disparities between owners and workers in U.S. memory, all at very high marginal tax rates. In other words there was no tradeoff, there was synergy!

JFK did reduce top rates from 90% to 70% and that was probably called for.  Reagan's initial supply side experiment, though, plunged us into red ink.  Whereupon Reagan did something responsible. Something that would get him drummed out of today's GOP. He raised taxes six times!  In order to adjust and bracket and fine-tune his tax policy, as any pragmatic person would do, when predictions don't jibe with reality.

In fact, there has never been proof that supply side cuts ever correlated causally with bursts in economic activity!  This is because most rich people do not take sudden cash infusions and invest them significantly in entrepreneurial new enterprises, or risky R&D, or the capital equipment needed by old businesses to deliver new products and services. Nor do they rush out to spend the money on purchases, thus adding high velocity transactions to the economy. Not at the spending ratios of a middle class family. Ever since Adam Smith's time, we have known what most members of any aristocracy do with such largesse. They spend it in low velocity ways, on passive securities and land (feeding asset bubbles), on what Smith called "rent-seeking," on gambling speculations, and on being richer.  

All of which explains why #3 -- the giant Bush tax cuts for the wealthy, enacted as soon as Bill Clinton was out of the way, did not erase their own cost to the treasury, as predicted. Instead, they opened up a huge deficit hole and contributed to the asset bubble collapse.

The astonishing thing is that now, amid a near depression, the GOP is doubling and tripling down upon their mantra.  The Bush tax cuts did not improve things from the Clinton Era?  Then do more tax cuts. For the rich. It'll work this time fer sure.

4)  Two multi-Trillion dollar quagmire wars of "nation building." Pouring hundreds and hundreds of billions into far-off deserts where we were hated, are hated and will be hated for generations to come. Republicans have long admitted that our reasons for going to Iraq were at best mistaken, at worst concocted lies. So those reasons got replaced with idealistic ones. Nation building and spreading democracy -- in the rockiest, worst soil that anyone ever tried to plant democratic seeds. 

In retrospect, we have to ask, "why didn't anybody warn us that this was repeating the calamity of Vietnam?"  

Well, in fact, the generals and admirals did exactly that. They complained like hell! Many were fired by Bush and Rumsfeld for daring to foresee us getting stuck in asian quagmires.  

Who benefited? Well, for starters, Halliburton, of course.  Funny, that. Who else benefited?  Guess who. 

Iran.  All of Iraq and half of Afghanistan were doomed from the start to become satrapies of Iran. No other outcome was ever possible. All other fantasies were delusional. Was that worth the loss of lives and treasure in both of America's longest wars? (See: How Republicans and Democrats Wage War.)

Oh, and the war cost was never put on the books. It was armwaved away.  Till honest accountants took over. And now we must pay the piper. 

== The scorecard so far ==

Those are the four biggies. So can we assign blame yet?  

The number one cause of the deficit -- an asset (housing) bubble that plopped us into recession -- was bipartisan, though the biggest steps took place when the GOP held all the reins of power in all three branches of government.  

Cause number 2, which turned a recession into a borderline depression, was almost entirely Republican in origin. As were causes 3 and 4.  GOP-instigated, stage-managed and caused, top to bottom.

But our list is not finished.  So far, we've covered only the worst budget-busting calamities.  But not all of them, by a long shot.

5) Medicare Part D, a wholly GOP-devised program, was never funded through hard choices, but simply slapped into general obligation as an new and unfinanced entitlement. (By contrast, Obamacare is funded by hard-nailed tradeoffs. We'll see if they work, but the CBO says they at least look sincere.) 

What's Medicare Part D? A vast expansion of the government's obligation to pay for prescription drugs, which was heavily backed by (surprise) the Pharmaceuticals industry. Abandoning any pretense of negotiating over prices (Obamacare will reinstate some bargaining) Medicare Part D was denounced by the libertarian wing of the GOP as both socialism and a blatantly pandering voter bribe.  In fact, this part of Medicare could be considered a "Tytler largesse." It was a budget buster because no attempt was ever made to shift funds or otherwise pay for it.  Not even a fig leaf!

It passed when all three branches of government were completely controlled by the Republican Party.

6) Failure of creative breakthroughs.  This is my own candidate for a major budget buster -- perhaps the most significant, from my admittedly skewed perspective as a Big Picture Futurist.  But any economist will at least admit that it belongs on the list.

Can we pause while I explain? Across the last 70 years, of Pax Americana, the world has seen a boom in prosperity unlike any other, with 70%+ of the planet's population arguably in some kind of middle class, moving into homes that have electricity and hot water and kids in school.  The biggest driver of economic development has been the American consumer, buying trillions of dollars worth of crap we never needed.  Elsewhere I argue that this trade pattern was established deliberately by George Marshall, by Acheson, Truman and Eisenhower.  It has been the world's hope... though ecologically dangerous, unless we innovate ways for seven billion middle class lives to impact the world far less. Remember that word, innovation.

Closer to the point, how have we Americans been able to afford the endless trade deficits that propel world development? Simple. Science and technology.  Each decade since the 1940s saw new, U.S.-led advances that engendered enough wealth to let us pay for all the stuff pouring out of Asian factories, giving poor workers jobs.  Jet planes, rockets, satellites, electronics & transistors & lasers, telecom, pharmaceuticals... and the Internet. How I'd love to see a second "National Debt Clock" showing where we'd be now, if we (the citizens) had charged just a 5% royalty on the fruits of U.S. federal research. We'd be in the black!

The first decade of the 21st Century -- the Naughty Oughts -- was the first (since the 1940s) that saw no such technological tsunami, making America rich enough to buy from the world.  As the internet boom petered out, we could have made sustainable energy our Next Big Thing. It was proposed, and the rate that China and Germany are getting rich off solar and wind is most impressive! 

By coincidence, that was also the decade when the Fox War on Science hit full stride. When science became the right's enemy number one.

If not for that, and Bush cuts on R&D and all the rest, would we have had another renaissance and tech-driven boom by now? I cannot prove might-have-beens.  But it is no accident that this failure of the expected decadal innovation wave happened in the wake of an epochal and telling event. When the GOP banished from Capitol Hill all of the advisory panels on sci and tech that had helped Congresses to legislate wisely for 60 years.

I will never forgive Nancy Pelosi for failing to reverse that scandalous treason, so yes, I can name some democrats who share blame. Still, American scientists are voting with their feet. Only 5% of still call themselves Republican (it used to be about 50%). 

The verdict is clear. We know who has torpedoed the one thing that kept us rich.

7) Entitlements and Obamacare.  Everyone knows that entitlements need to be restructured.  In fact, compared to Europe, the U.S. is in pretty good shape.  Social Security is estimated to be almost able to handle the baby boomers. Why? Because past Congresses bit the bullet and passed - in a bipartisan way - graduated increases in the retirement age. (Further tweaking... plus the raising of income limits on FICA, could go the rest of the way.) And we never meddled in the labor market with stifling paternalism, the way European countries have. In this area, the Europeans are in crazy denial and badly need to emulate us.

On the other hand, we have been in denial re Health Care, which is inherently not a fungible commodity subject to market forces.  When we spend three to four times as much per patient and still leave tens of millions of terrified citizens not covered, only truly delusional people can call the US system the "best in the world." And only a lunatic would call the Emergency Room a "health care system." Something different from European-style rationing could have been negotiated... 
.

.. and indeed, negotiate was what Obama tried to do!  By abandoning all of the former democratic proposals and plopping onto the table the Republicans' own plan.  

At which point the GOP instantly disavowed its own plan and denounced it as socialism. (Do not cavil over slight differences. Those were on the table too. They could have been negotiated, had anybody tried.)

In any event, the range of predictions about the effects of Obamacare on the deficit is so wide, there is only one reasonable option, since going back to the insane former system is a non-starter.  Let's try it and see what happens... then pragmatically tweak the result.  Especially since those who foresee the worst outcomes have no credibility.  They happen also to believe in never-ever-right supply side economics.

The crux on entitlements? The method that was used to extend Social Security could be applied to other entitlements.  If Americans are living much longer, in better health, they should be asked to delay retirement a bit longer, and in return FICA could be made more progressive by removing income cutoffs.  Big deal.  Make a bipartisan deal and most of us will shrug and accept it. This already happened! The Clinton-Gingrich deal on Welfare Reform is another example that proved democrats and republicans can demand much from their constituencies, if common sense and bipartisan negotiation favor reasonable adjustments.

 Simpson-Bowles and other cross-party commissions have offered the political protection needed, if we ended Culture War and both sides wanted to negotiate a way to fix entitlements.  I believe the collapse of negotiation is rooted primarily in one party and its cosmically-frenzied polemical center (Fox). But in bending over backwards to be fair, I will allow this one to be blamed on both.

8) The discretionary budget.  Okay, Slay Big Bird in exchange for zeroing out all the generous tax and subsidy bennies given to coal and oil and other GOP donors?  Sure, I'll go with that.  

But first add them up.  Note how small the benefit to the bottom line.  For the most part, screaming about the discretionary budget is an effort to distract from the long list of disasters in other areas.

Remember, we paid for Big Bird and the other stuff just fine, under Bill Clinton.  If you're serious about looking for the reasons we're in a mess... look at what changed.

== So what's the indictment? ==

Eight causes for the deficit.  Can you think of others?  I'll add them to the list, if they approach the same scale.

As for blame?  Of the top five contributing causes, one was bipartisan (though GOP-led).  The other four were entirely Republican in origin and execution and (especially) in obstinate refusal to learn from the mistakes.

Number 6, I will argue, though not insist, is a huge calamity that I deem to also be largely GOP made.

Then we get to the parts that get the biggest noise, but in fact have the least impact on our plummet from Clintonian pay-down to skyrocketing Bushite debt (that has continued under Obama.)  Numbers 7 and 8 can and should be argued, openly, calmly and sanely by decent, intelligent men and women, compromising and negotiating plans to deliver the functions of government in lean and effective ways.

How I would love to see that conversation!  To assist Goldwater-style Republicans and Tsongas-style Democrats working their (and our) way to fiscal solvency.  

But let's not fool ourselves.  So long as we pay no heed to problems # 1 - 6, we are slapping on band aids.  And numbers one through six happened because of sickness.  Incompetence. Insanity.  Or something much, much worse.

The lesson from all of this?

The good news? Several of these failure modes are fading away.  Too slowly.  But soon we'll be out of the wars. Personal debt has been de-leveraged and consumer confidence is up. The Consumer Finance Bureau and other professionals are at least starting to watch out for us. Housing is recovering, In order to survive, the GOP will have to tell Grover Norquist to chase himself and reach a compromise over the expiring Bush Tax cuts.  And even science is starting to recover.  Indeed, if trounced, the GOP may take a veer away from Murdochian cliffs of insanity, back toward the traditions of Buckley and Goldwater and the fine art of sane negotiation.

The bad news? Unbelievably, in the present election, the citizenry might actually re-hire the gang that did all this to us. Proving that hypnotism and incantations can trump facts -- fooling some of the people, all of the time. Enough of the people.

The lesson is simple: do not re-hire the dopes who made the mess.  Who committed the first half dozen travesties.  If you do, future generations will have you to blame.

David Brin

http://www.davidbrin.com

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