President George W. Bush and the Republican Congress he worked with, added nearly $5 trillion to the national debt during his first six fiscal years. Members of The Rational Middle will not be surprised to read that statement. Bush’s doubling of the debt is not the reason for the Great Recession. Perhaps that statement is a surprise. A singular fact of economics needs to be understood by the citizens of this democracy, and that knowledge is needed now more than ever: budget deficits do not cause recessions.
Throughout this recession and recovery, the fact that budget deficits have nothing to do with recessions has been consistently ignored by those that do understand. Linking the two items has political benefits for both sides of our rusted two party system. Democrats were able to hammer Bush for his war spending and top heavy tax cuts, Republicans are able to hammer Obama and the Democrats for social and infrastructure spending. The Tea Party is able to lash out in anger at everyone, because the political figures in that group lack even the most basic knowledge of anything fiscal.
TARP, Wall Street, big banks, investment banks, car companies, Stimulus, housing bubbles, Fannies & Freddie, deficits, exploding deficits, extended unemployment benefits, lions, tigers, and bears…oh my! I really don’t blame folks for screaming; “What the heck is going on!” In answer to all of this complexity, some news outlets and politicians have “simplified” the situation for us common folk. In their words, the bailout and stimulus, TARP and other measures are all the same deal. And, in the common refrain of our time, they are all President Obama’s fault.
Of course, some of this is the responsibility of our current president, while some of the “blame” goes to the previous president. It is my contention that most of this activity was necessary and effective, if not always executed with the greatest efficiency. Our economy is in a bad way now, but it would have been much, much worse. I think it is critical that we explore these issues, because the policies that made them necessary are threatening to make a second pass. The story of the Great Recession is a story of Americans spending a great deal of money without getting much of substance in return.
Deficit hawks are in the news a lot lately, and it seems that the label is one that every politician aspires to earn. Who wouldn’t want to be associated with “fiscal responsibility” and “sound financial management”? In the interest of full disclosure, I must admit to being proud of President Clinton’s accomplishment (achieved through the Deficit Reduction Act of 1993, and not through the efforts of a GOP-majority House not in office until 1995). He managed to start paying down the debt largely incurred on President Reagan’s watch. I was even aggressively critical of President Bush’s expansion of federal debt (for those with short or tea-compromised memories, he doubled the debt during his term).
Here’s the thing; in as much as I was critical of debt and deficit for debt and deficit’s sake, I was wrong. Basic economics tells us that, for the United States, there is no term risk of bankruptcy to worry about. Large and accelerating structural debt is a problem when matched with a national economy humming along near full capacity. The threat, if the above happens, is inflation. I know that techno-jargon is annoying friends, but this is important. When you hear someone frantically warning of “our debt crisis”; ask them why. Our economy is currently nowhere near full capacity, and won’t be anytime soon. The market continues to accept low interest rates on long term federal debt, meaning that it does not consider that debt to be risky. We are not Greece. We can print the money that our debt is denominated in, with the risk again, being inflation. Greece can’t print their own money. and they can’t manage interest rates within their economy either. We can.