For those of you interested in reading Sen. Marco Rubio’s letter to President Obama, calling on him to renounce a debt ceiling increase, click on the link below.
One of my favorite movies is Cool Hand Luke. In the movie, Paul Newman plays the title character, a WWII hero turned petty criminal who refuses to accept that any man has authority over him unless he grants it. His nemesis is the prison warden (“Captain”) who is determined to break Luke’s spirit. During one memorable scene, after Luke’s capture from his first prison escape, “Captain” delivers the line
“What we got here is … failure to communicate”
Lately, I’ve been getting the feeling that Barack Obama would be excellent in the role of “Captain.” He certainly seems determined to break the spirit of the American people – and then blaming us for his failures. He scold us about the economy almost daily: “Well, you know, I inherited the worst economy since the Great Depression and…” Yes, Mr. President, we’re well aware of what your policies have done to the economy. You took 5% unemployment, sprinkled some of your pixie dust and
all the jobs disappeared. That pixie dust was mostly made of tripling the deficit, selling it by telling us that unemployment wouldn’t cross 8% – but without all of that extra debt, the economy would certainly tank. Fast forward 18 months to the mid-terms. Faced with a soul-crushing economy and an American people distrustful of your policies (not atypical for people who’ve been lied to), you took to blaming… not the message (something about cars and ditches) and not the messenger (because we’ve all been told what a terrific orator you are) but the American people (because we’re too stupid and too busy clinging to guns and religion to understand how good we have it). Then you seemed dumbfounded when your party and their crazy ideals of “spreading the wealth around” got chucked out on their butt.
“What we got here is … failure to communicate”
Fast forward another 8 months and once again, we’re being assaulted by daily pronouncements from the Annointed One. This time, the debt ceiling has been reached. After weeks of having our senses assaulted by your minions telling us the sky will fall come August 2nd, we’re nearly at the appointed day and time. Never mind that this sort of thing generally gets hammered out in the underground corridors of the Capitol; you had to create a crisis. The reason? Apparently to lecture us idiots on the necessity for higher taxes and more spreading the wealth around, only this time couched as “sharing the pain.” Only this time, not even the denizens of your own party are believing that straw man any longer. Every American you talk to is pretty certain that the economy can’t get much worse, but the one thing we can do to ensure that it does is listen to your proscriptions. I guess the TV performance last night was meant to scare the US populace into adopting a plan that nobody has written down anywhere (one heavy on your usual bromides), instead of allowing the House and Senate to haggle out the differences in their resolutions.
Yep, Mr. President, I’m certain that come August 3rd, you’ll be out there blaming us poor, ignorant, ordinary folk for not understanding why you’re the best thing to come down the pike since sliced bread. I’m certain you’ll be comparing your role in the debt crisis with that of Leonidas of Sparta. (You know, valiant last stands no matter the personal cost, blah, blah, blah). In reality, all this episode has proven again is that you can’t lead from behind. Oh, and that for all of your awesome rhetorical abilities…
“What we got here is … failure to communicate”
President Obama has finally realized the federal debt is a real problem, not something that can be pushed off for another decade or so. I’m not certain what woke him to a fact millions of Americans already understood, but welcome to the party, anyway. Unfortunately for the country, he seems obsessed with the idea that the reason our debt problem is crucial is because the federal government doesn’t have enough money.
On the one hand, the President is right when he says that federal revenues are lower than at any point in a generation. In 2011, the government is on pace to gather less than 30% of the nation’s GDP in revenue for the first time since 1983. But the reason for that isn’t because tax rates are too low – it’s because despite all of those reassurances that the economy is recovering, it isn’t. After adjusting for inflation, real GDP growth has fallen to less than 1% and is in real danger of turning negative. Add in the fact that that the economy is now 14 million jobs short of full employment (vs. 8 million when he took office), and it becomes pretty easy to see where the revenue shortfall comes from.
In traditional Democratic fashion, the President’s answer to the economic malaise has been to throw as much money as possible into the economy. The results have been disastrous. Deficit spending as a percentage of GDP during his tenure is running higher than at any point since the closing days of WWII. Since 2009, the federal deficit has averaged 9.91% of GDP, the second highest three year average over the past century. Only the period from 1944-1946 saw a higher level of deficit spending, at 24.02%. But besides the obvious (we were spending to save the world then), there are two marked differences between that period and this one:
- The US GDP accounted for close to 80% of the world’s total economic output. Europe and Asia were bombed out ruins and wouldn’t actually see real recovery for another 15 years. Africa and South America were not industrial or economic centers. Much of that debt was racked up as loans to our allies and repaid by the mid-1960’s. Today, the US is now less than 30% of world GDP and projections show us steadily losing share over the next decade. We face the prospect of having to pay much of our debt to overseas lenders, while at the same time having fewer assets with which to pay them.
- All of this new spending is taking place on top of what was already a huge debt burden to begin with. At the advent of WWI, the total federal debt – even with New Deal spending – stood at 67.62% of GDP. When the current recession began in 2007, debt stood at 85.53% of GDP. Today, we’re at 129% of GDP –the only time it was higher was from 1946-48. But by 1950, debt was down to 97.7% of GDP and by 1960, 70.51%.
The President has spent much of his time screaming from the mountain that the tax cuts enacted under his predecessor (which he voted for, by the way) are the leading cause of our current deficits. But he should re-check his math: in the 6 years after their passage prior to his assuming office, federal deficits averaged 2.04% per year – roughly one-fifth of the deficit spending under Mr. Obama. And federal revenues averaged 33% of GDP, slightly higher than the average for the previous 20 years (32.7%). So where is the discrepancy? If those tax cuts actually produced more revenue, why are deficits exploding?
The answer is completely on the spending side of the equation. Under President Bush, federal spending averaged 35.08% of GDP. Under Presidents Reagan, Bush Sr., and Clinton, federal spending averaged 34.83% of GDP. Under President Obama, federal spending has averaged a whopping 40.72% of GDP. For historical perspective, under President Roosevelt spending averaged 27.62% and under President Johnson (who also fought an unpopular war and greatly expanded social services) federal spending averaged 29.82% of GDP. In fact, the US government didn’t begin spending more than a third of our GDP consistently until the Carter administration.
In short, the President can stop with all his nonsense about needing to raise taxes. If he wants the nation to take him seriously when he says he wants to balance the budget, then he should start by simply bringing spending back down to the historical levels for the previous 30 years. That won’t solve all the nation’s economic ills, but at least that’s the starting point for a rational discussion.
One of the things we keep hearing from “establishment” politicians, economists and others is that the US entered into the Great Abyss yesterday afternoon. “The sky is falling” they cry. “We’re doomed” they yell.
You see, the United States of America just crossed the Rubicon. The debt ceiling – the amount of debt Congress authorizes the Treasury to accumulate – has been reached. The great fear is that the US government is about to default on our public debt, sending the world into an economic vortex never before witnessed. Every talking head and government official in DC is warning against not raising the debt ceiling. “We’ve never defaulted on our debt” is the common cry of alarm.
I would certainly be alarmed at this outcry, except for one thing. It isn’t true. Not a single word of it. In fact, the nation has defaulted on the debt at least twice in our history. The first was in 1790, when we couldn’t service the debt we accrued during the Revolutionary War, among other things. The second was in 1933.
In 1790, the Treasury realized it could not possibly repay the outstanding loans the Federal government assumed after the ratification of the Constitution. The solution was to unilaterally rewrite the terms of those loans, reducing the interest owed and deferring payments for ten years.
The scenario most applicable to today is the one enacted by FDR in 1933. The government, faced with a debt it could not repay unless taxes were raised to incomprehensible levels and wanting to inject some life (i.e, capital) into a lackluster economy, devalued the dollar by more than 40%. The problem was that US bonds were issued in gold: you bought x amount of bonds in dollars and in return you received y amount of gold when the bond matured. The US didn’t own enough gold to cover the debt. The solution was Executive Order 6102, later codified as the Gold Reserve Act of 1934. It essentially confiscated all of the private gold holdings in the US (private citizens were allowed to have 5 troy ounces in their possession; or about $7500 worth in today’s standards).
The exact opposite of what we’ve been told by economists and politicians of all stripes happened: rather than market chaos and depression, the economy stabilized. Freed of the uncertainty spawned from over-indebtedness, the business community actually began expanding again. Yes, the Great Depression was so deep that it took additional government spending to make up for the slack in employment. But contrary to popular myth, it wasn’t the massive infusion of government capital with the outbreak of WWII that jolted the US to full productivity. By 1939, the nation’s economy was growing at 1928 levels again and by the end of 1940 had grown private sector employment to higher numbers than at the outset of the Great Depression. In fact, all of that debt from 1941-1945 precipitated a debt crisis in 1946 comparable to the one we’re now facing. Oh, and Congress took the appropriate actions then, too: they enacted a debt reduction plan that was adhered to by Presidents of both parties until LBJ’s “Great Society” spending in 1967.
Simply put: the US has defaulted on debt obligations before and the world went on as always. Look around you: the debt limit has passed, yet everything continues as on Monday. The real threat is that we continue to spend as profligately as a drunk sailor without any plan to tackle the debt. We can argue about the means to do so. We can inflate it away, as Russia, Argentina, Brazil – and the US in 1933 – did; we can unilaterally reorganize bond terms, as in 1790. We can reserve a greater share of federal revenues for debt service, as in 1946. We can even place tax increases and restructuring on the table. But scaring the citizenry about the implications of failing to to raise the debt ceiling is ludicrous, when raising the the ceiling is the most irresponsible thing the politicians now in Washington can do.