Monday, July 25, 2011

Spend And Borrow Conservatives Created This Mess

Kenneth M. O’Brien

After decades of listening to the epithet “tax and spend Liberals” the truth has become clear.

Anyone who can divorce themselves from their ideological (dare I say religious) biases need only look at the facts.

From the election of Ronald Reagan in 1980 to the election of Barack Obama in 2008, Republicans controlled the White House for twenty out of twenty-eight years.

From the end of World War II until Reagan’s election the debt to GDP ratio of the United States was steadily brought down by all Administrations.

During the same period, the standard of living of average Americans steadily improved.

The Reagan Revolution launched an economic agenda that turned America into something it hadn’t been since the end of World War II, a society defined by economic class.

As I showed in an earlier article, from 1980 to 2008 the trend in the ratio of national debt to GDP was dramatically reversed. With the sole exception of the eight years of the Clinton Administration the debt burden of the United States increased steadily.

During the same period there was a massive redistribution of wealth from the American middle class to the wealthiest Americans.

As Lawrence Summers noted,” From 1979 to today, those in the bottom 80 percent of the income distribution lost 7 percent of their real annual income. Those in the top 1 percent gained 7 percent of their real annual income—and 43 percent of all their income was attributable to the shift in income distribution—in other words, to greater inequality. The magnitude of the transfer is $640 billion for the top 1 percent—or a gain of nearly $600,000 per family—and a decline of $7,000 for each household in the bottom 80 percent of the distribution. These numbers are enormous compared to the stakes in conventional debates on distributional policies or discussions of assistance for workers affected by trade.

Growth in the economy was sustained, not through increasing wealth of the public at large, but by demand sustained through debt financing. Part of this was increased consumer debt to compensate for declining real incomes and the other part was debt-financed government spending.

We have seen this movie before. It occurred during the Roosevelt Administration.

While the government pursued Keynesian spending policies, GNP increased and unemployment fell. Starting in late 1937, however, the Roosevelt administration reversed policies. Fearing the consequences of rising budget deficits during an election year, they returned to the traditional pattern of attempting to balance the budget. However, the resulting increase in unemployment and decline in GNP caused the administration to again reverse course and return to its earlier stimulative spending policies.
The following charts illustrate the consequences of these two alternative policies during the period from the start of the great depression to the start of World War II.

Those who argue that we have to cut spending without increasing taxes have it exactly wrong.

The blather that we can’t increase taxes on the “job creators” in the current economic climate is nonsense. They had these tax breaks from virtually the beginning of the second Bush Administration and the result was a net zero in job creation during those eight years.

On the other hand, the only factor maintaining any real level of demand in the U.S. economy is government spending. That is already being cut at state and local levels with numerous job losses resulting in increased demands on social safety net spending and declining tax revenue as well as aggregate demand.

There are those who will say that it does no good to place blame at this late date.

Well, I respond that I coined the term spend and borrow conservatives years ago in an article in the local paper. Further, if people don’t awake to the facts as they are, not as the conservative cultists would like them to be, we will continue the economic policies of the last thirty years that have led to this mess.

The ratio of debt to GDP is the highest it has been in 60 years. Simultaneously, however, tax revenue as a percent of GDP is the lowest that it has been in 60 years.

The fundamental fact is this – tax and spend Liberals were at least able to pay their bills.

Spend and borrow Conservatives clearly cannot!


  1. Don't forget at the time that the bottom 80% were losing income in real dollar terms that they were covering the differential through consumer borrowing. Credit cards and second mortgages replaced income to purchase needed and desired goods. Part of what we are seeing now includes the deleveraging of the bottom 80% and the drying of demand as that deleveraging continues. One way to increase demand would be to increase income for the bottom 80%. You know the people who will spend the money on things they need.

  2. This post is fantastic. I'll send you a bouquet of lemons.


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