Posted by
Patrick Henry on Wednesday, September 22, 2010 11:00:13 PM
During this election season the national deficit is very much in the news. Yet a few
conversations with friends will quickly convince you that people do not really under-
stand deficits or where they come from. Each of the major parties has acccused the
other of being primarily responsible for the current economic downturn and deficit
growth. Each is right. And each is wrong.
What is a "deficit?" A deficit occurs when one spends more than one earns. If you
make $60,000 this year, but spend $70,000, your annual deficit is $10,000. Keep
doing that, and you will soon be so deep in debt that you cannot earn enough to
repay what you owe, and bankruptcy will follow. It is not different at the national
level. When a country habitually spends more than it takes in, its deficit continues
to grow, pushing it toward a fiscal doomsday.
President Barack Obama and the Democratic party are facing a particularly
difficult election in November. The economy is in a terrible and prolonged slump,
unemployment remains high, credit markets are tight and home foreclosures keep
rising. People concerned about the economy tend to blame the party in power
when there is no relief in sight, and that means a lot of angry voters are blaming
Democrats. Obama and his party argue in response, that for eight years George
W. Bush and Republicans spent so much and took in so little in revenue that they
dug such a deep hole that Democrats need longer to dig out. In particular they
blame across-the-board tax cuts instituted to keep a Bush campaign promise. So
are Democrats right? The answer is no -- and yes -- and no again.
It is spending, not tax cuts per se that brings about deficit. When a government
cuts taxes, they don't give taxpayers anything except the right to hold onto more
of what is theirs. Cutting taxes is not paying out money, and on that point the
Democrats' argument is far too facile and mostly disingenuous. However, if
government cuts taxes and then continues to spend beyond the revenues it does
collect, a deficit is created. This is what happened over the last eight years.
Republicans certainly bear some responsibility for this. They chose to fight
wars in both Iraq and Afghanistan simultaneously. To do this, they relied heavily
on so-called "emergency spending" bills that did not require a plan to pay for
them at the time they were enacted. Democrats, many of whom opposed one
or both wars, would only agree to funds for the troops if Republicans, in turn,
allowed them to spend for social programs and pork-barrel special projects. By
making this deal with the devil, Republicans abandoned their principles of small
government and fiscal conservatism, deeming the winning of the wars sufficient
reason for doing so. However, Democrats controlled the legislature for the last
two years of Bush's term in office, and were happy to go along for the ride.
While this "drunken sailor" spending binge continued, the wars went on,
creating a constant cash need to fund the military machine. And meanwhile a
silent bomb was ticking. Under President Bill Clinton, legislation was signed
into law making it easier for many families to own a home. Clinton's attorney
general, Janet Reno, threatened to sue mortgage lenders who did not lend to
minorities seeking home ownership. Insured by federal mortgage giants FNMA
and FDMC, lenders were encouraged to relax income and credit qualifications,
and accept lower downpayments. Bush also signed a successor bill that urged
even more such lending. Then he realized that FNMA and FDMC were seriously
over-extended, backing far too many high risk loans. To make matters worse,
Wall Street bankers and financiers had purchased blocks of these high-risk notes
and pooled them into real-estate based securities that many invstors purchased.
Seventeen times Bush implored congress to investigate FNMA and FDMC to
right the ship before disaster struck. Democrats, with a huge political stake in
the minority community resisted, and repeatedly thwarted efforts at reform.
When the real estate bubble burst, and it became obvious that the "liar loans"
(so-called because they were made without documentation of income or credit)
were worthless, the dominoes started tumbling precipitating a near-fatal bankng
crisis in which the government, through the Troubled Assets Relief Program
(TARP) were forced to bail out the big banks using borrowed money. That
money was supposed to be repaid by the banks, but has only been partially
recovered to date. Lax securities regulation was the fault of both the Clinton
and Bush administrations, just as both political parties bore the blame for
overspending and rampant borrowing. All the Bush tax cuts did is deprive the
government of a portion of taxpayer funds it could have used to pay down
deficit, though there is no guarantee it would have done so.
When Barack Obama took office, he doubled down on the spending binge,
insisting on huge new entitlements, a bloated three-trillion-dollar annual
budget and more borrowing to support it. His plan was to allow the Bush tax
cuts to expire at the end of 2010, to create a fresh stream of revenue to pay
for all of his spending. Now, with families hurting, people out of work and
the whole economy in the doldrums, even Obama has reluctantly agreed that
the tax cuts must be temporarily extended, albeit not for those earning over
$250,000 per year.
Emerging from the financial chaos has been the Tea Party movement, whose
principles include dramatically shrinking government in order to require less
revenue to operate, and maintaining low tax rates. Initially pooh-poohed by
the political class, the Tea Party (named for the colonial uprising against the
British in Boston harbor) has galvanized a country weary of out-of-control
government and the threat of higher taxation, into a formidable political force
that has ousted some of the politically entrenched elite and called out others
as RINOs (Republicans in name only) because they have betrayed their
party's principles by compromising with Democrats in what seems a suicide
spending pact. The Tea Party has become a powerful populist movement
that is pulling the Republican party in a significantly more conservative direction
as a price of voter loyalty, and infused enough viable candidates of its own to
assure that their feet will be held to the fire once the election is over.
So who is ultimately responsible for the deficit? The government, present and
immediate past, which means Democrats AND Republicans. Did the Bush tax
cuts cause it? No, government overspending did. Will things change between
now and 2013? If they don't we're all in deep trouble.