Almost everyone has awakened one morning filled with remorse over the previous evening’s behavior. Perhaps it was the time, drunk as a billy goat, you bepissed the boss at the office Christmas party. That’s what it’s like in the American economy today. We all knew that, starting in the early 1980s, the nation was consuming more than it produced and making it up by borrowing — greatly from foreign countries that were prospering as we sent them jobs. How could we not have realized that ultimately this would be as self-destructive as urinating on the boss?
The 1980s mantra was “Morning in America.” Now we’re “mourning in America.” The party is over. We all share blame: consumers, governments, corporations, financial institutions. The big blast began in the 1980s, but both Republicans and Democrats are responsible for the mess. Remember, too, that the economic contraction is global; we aren’t the only country that overborrowed to overconsume.
A little history is in order. In the 1930s, an economist named John Maynard Keynes said that the nation must spend its way out of the Great Depression, incurring unbalanced budgets to do so. (But we forgot that Keynes said we should restore fiscal sanity once the economy recovered — advice we subsequently almost never followed.) During the Keynes period, we were told that private virtue — thrift — was public folly.
The Democratic Party made hay of the new mentality. Its shibboleth became “Tax and tax, spend and spend, elect and elect.” Conservative Republicans and Southern Democrats clung to the old virtues of fiscal responsibility, balanced budgets, self-reliance, saving for a rainy day, avoiding debt to buy what one couldn’t afford — that is, not living beyond our means. But this philosophy was called reactionary and was politically unpopular; liberal-spending Democrats dominated the Congress in the 1930s through the 1970s. To get elected president, a Republican (say, Eisenhower or Nixon) had to say they were “moderate” — just a little less spendthrift than Democrats.
Robert Snigaroff of San Diego’s Denali Advisors points out that from 1950 to 1982, consumer spending was 62 percent of the total economy. By 1990, it was 70 percent. “Baby Boomers became spendthrifts” as they neared retirement, says Snigaroff, but we can’t blame only that age cohort. Beginning with Ronald Reagan in 1981, greed washed over the whole country. Consumer debt was 44 percent of total economic output in 1982 and is now 100 percent, notes E. James Welsh of Carlsbad’s Financial Commentator.
Beginning in the 1980s, Republicans discovered that they could buy votes just as Democrats had been doing since the 1930s. But the Republicans would do it by cutting taxes. They convinced a gullible public that the tax cuts would pay for themselves. Federal deficits soared, but Reagan said government spending was to blame. Nonsense. When Reagan — supposedly the conservative spending-slasher — took office, government spending was 35 percent of total economic output. It is still 35 percent of total output.
The combination of huge federal deficits and easy money from the Federal Reserve continued under George H.W. Bush. Under Bill Clinton, there was tight fiscal policy (balanced budgets) but very loose monetary policy (excessive money creation). Under George W. Bush, it was loose fiscal and loose monetary policy. Excessive consumption became patriotic: remember when W told Americans to buckle up for danger after 9/11 but to continue spending at the mall?
Meanwhile, Wall Street became a casino: exotic, inscrutable financial instruments flooded world markets — all based on debt. Many are now collapsing.
Only a few conservative Republicans and Democrats — many of them Southern — warned that this philosophy would lead to a crack-up. A mere handful of economists and commentators saw what was coming: A. Gary Shilling, Henry Kaufman, Jeremy Grantham, Warren Buffett, James Grant, for example. Almost all others were afflicted by career risk: pointing out that the binge couldn’t last was equivalent to pissing all over your employer.
Now the political and economic consensus holds that we must get out of the dilemma by having more of what got us here: excessive borrowing for consumer and government spending, along with tax cuts and low interest rates. We’re told that once the economy recovers, then we must go back to frugality: less spending, more saving, balanced budgets. That was the advice Keynes gave. Nobody listened then. Will they now?