Archive for July 30th, 2012
In 1980 I voted in my first Presidential election and like many people, voted for Ronald Reagan because of his optimism and vision of better times for America. The late seventies had been traumatic. After first bringing a sense of relief to a country torn apart by Vietnam and Watergate, Jimmy Carter seemed helpless as the US slipped into another oil crisis, a recession, and renewed tensions with the USSR. In retrospect Carter handled the situation about as deftly as one could, but to a country used to being on top, it felt like we were in decline.
I had been a fan of Reagan’s back in 1976 when he challenged Gerald Ford for the Republican Presidential nomination. His optimism was contagious, he was likable and seemed to offer a clear answer to our problems: freedom and confidence.
Alas, the reality turned out to be much different. When President Reagan took office the US debt was 30% of GDP, considerably lower than that of most European countries. However, the deficits climbed in the 80s:
In 1977 the deficit was $53.7 billion. That was low enough to help pay down the US debt, as the economy was growing faster. It was down to $40 billion in 1979, though the recession caused a sky rocket to $73 billion in 1980. Then the debt started to pile up:
1981 – $79 billion (mostly Carter’s budet), 1982 $128 billion, 1983 $207 billion, 1984 $185 billion, 1985 $212 billion, 1986 $221 billion, 1987 $150 billion, 1988 $155 billion. Things would improve after that, and for four years (1998 – 2001) there would be supluses before debt would skyrocket again.
During the Reagan years debt went from 30% of GDP to nearly 60% of GDP. Private debt grew just as fast, and credit card debt began to grow (it was very low before 1980). Reagan’s rejection of the “malaise” of the 70s was straight from Michelob’s marketing department — we can have it all! Low taxes, less regulation, and more spending!
That was, unfortunately, the wrong direction to go. Working in DC for a Republican Senator in the early/mid 80s I recall hearing constantly how the deficit was not a problem. When told that during an economic boom one should keep surpluses in order to have money to stimulate the economy when the next bust comes, the response was predictable – counter cyclical funding was Keynesian demand-side economics. Laffer curve supply side economics was now the rage.
Others had a more Machiavellian view — increasing debt would “starve the beast,” making it impossible to continue liberal big government programs. Even as David Stockman, Reagan’s budget director, resigned out of anger over the economic illogic of the increasing debt, the growing economy with low inflation caused most people to close their eyes and enjoy. It was the 80s, after all!
This decision is now haunts us. The ‘we can have it all’ response to the recession of the early eighties was really simply a refusal to accept reality — that the US had to structurally adjust to the changing global economy and the fact that the rest of the world was catching up. The post-war superiority that the US enjoyed after WWII was over, and the US needed to find ways to live within its means and make sure that commitments didn’t overwhelm capabilities. We didn’t necessarily need to pay off the debt we had, but keeping a 30% debt to GDP ratio would have been smart.
Instead the so called “conservative” economists of the Reagan-Bush administrations (and later the George W. Bush administration — in which Vice President Cheney boisterously proclaimed budget deficits to be irrelevant) opened the spigots and borrowed and spent even during a boom. As long as inflation didn’t rear its ugly head, they figured it was safe. Add to that the deregulatory fervor that even the Clinton Administration joined in, and the cheap credit to the public coming from the fed, and it was party time for thirty years! Borrow spend, carpe diem, living high, living fine on borrowed time!
Add to that the end of the Cold War and all was grand — we won the Cold War, the Soviets and communism lost, it was going to be an American led free market world… what could go wrong?
Ross Perot, a successful businessman and political gadfly, saw the problem and brought it front and center in the 1992 election. It appeared to push the parties towards fiscal responsibility. Unfortunately the US was beginning an advanced stage of economic decline, perpetrated by two sequential bubbles, the “dot.com” stock bubble and then the real estate bubble. The latter was driven by both a renewed bout of debt from 2002 onward, plus very cheap and easy credit thanks to a misguided federal reserve policy. The result is that when the bubbles burst and dust settled we see that de-regulation, tax cuts, and deficit spending gave us about a total debt of over 100% of GDP, an economy that relied on consumption more than production, and imbalances requiring a deep and long recession to repair.
Both parties share blame. Both mouthed a desire to balance the budget but neither made the hard choices it would take. Instead they reached the Great Republican and Democratic compromise – lower taxes and more spending, financed by debt.
Reagan can’t be blamed for all this – it took a long term bi-partisan effort to do so. However, if we had heeded Jimmy Carter’s prophetic warning and avoided the Michelob “you can have it all” mentality, we might instead have built a sustainable economy in the 80s, immune to oil shocks and banking crises. We took a wrong turn thirty years ago, and it’ll take at least another ten to get on the right path — assuming we start making better choices now!
Looking back at being part of the large “youth for Reagan” group in Detroit in 1980, being on the floor when Reagan accepted the nomination (they let a lot of us in despite lack of credentials in order to give television the image of lots of young people supporting Reagan), I don’t regret going. Reagan did inspire hope, and it was an amazing experience. I even traded a big “South Dakotans for Reagan” pin for a Maine lobster decal I’d carry all over on my photo case for over ten years, never dreaming I’d actually live in Maine (I’d never even been there). But unfortunately the hope was misplaced. Reagan’s borrow and spend approach bought short term prosperity at a long term cost. But to be fair, he couldn’t have done it if it wasn’t a bi-partisan effort.