By Nick DAngelo
In the 1990s, New York Governor Mario Cuomo famously said, “Recessions come from Washington,” blaming the federal government for debt, deficit and economic turmoil. Over two decades later, the same charge is being made as we come closer and closer to the ominous process known as sequestration. Unless Congress acts, and soon, $85 billion in spending cuts will be automatically implemented, affecting budgets from national security to higher education.
The sequester process was put into place as an incentive for partisan lawmakers to come up with a compromise. Surprise, they didn’t. Instead, the past few weeks have seen a rehash of the same political talking points, as referenced through the debt ceiling debate, and then the “Fiscal Cliff.”
President Barack Obama has blamed a deadlocked Congress. Speaker John Boehner has blamed President Obama. Senator Harry Reid has blamed Republicans. If no one wants sequestration to even take effect, then why is it even happening?
Since the 1980s, the loyal opposition in Congress (regardless of party affiliation) has criticized presidential administrations for racking up debt through seemingly source-less spending practices. The Wall Street Journal has run editorials from big-wig economic writers emphasizing the risks of failing to stabilize the debt, drawing a direct connection between deficit spending and financial turmoil. Economic history sees it differently. During the Reagan administration, arguably the longest period of sustained economic growth in American history, debt spending rose exponentially. Between 1980 and 1988, expenditures had risen to $909 billion, a dramatic increase in government spending, which allowed the private sector to run equally dramatic surpluses.
According to economist Randall Wray, this is because the modern economy operates in three sectors: the public (government), the private (everyone else) and the foreign (trade). Not all of these sectors can have a surplus due to the cyclical system. Therefore federal deficits cannot be reduced unless the private sector surplus is also reduced.
Many look to the Clinton administration’s four balanced budgets, taking place during the Dot Com Boom, as an ideal economic scenario. The Goldilocks of economies, the 1990s was “just right.” Growth was sufficiently strong to keep unemployment low, but not so aggressive that inflation rose. But finally, the bubble burst due to the instability of the created economic environment.
The architect of the Clinton surplus was Alan Greenspan, a veteran chairman of the Federal Reserve by the time Clinton took office. A proponent of laissez faire economics, allowing the markets to self-adjust, Greenspan believed that if Clinton set ambitious deficit reduction targets for the budget, the Federal Reserve’s interest rate changes would be sufficient to offset the contraction to the economy caused by less government spending. According to Wray’s work, these actions created overconfidence, over stimulating the economy to unsustainable growth rates, which resulted in the 2007 financial crash. Hyman Minsky, an economist opposed to debt accumulation and an expert on financial crises, noted that those with more money take more risk, leveraging themselves in a dangerous economic environment.
But wait—I’m a conservative. Shouldn’t us conservatives like spending cuts? This isn’t about blind ideology, but a basic premise of the conservative philosophy is responsible government. Often, that should mean financial accountability and spending within our means, but it also means providing some of the necessary services government is meant to provide.
As for how much debt matters in the American economy? Conservatives need look no further than Milton Friedman, one of the most celebrated conservative economists of the 20th century, who noted that the United States is a sovereign issuer. As such, our nation owes debt in a currency that is both controlled and issued by its government. There can be no insolvency, nor default unless Congress deliberately allows it—maybe Cuomo was on to something after all.
All of this won’t stop politicians from spitting their “deficit hysteria” rhetoric, as Wray refers to it as. The public image of dangerous debt, verging on apocalyptic, may always replace true economic dialogue. As debates continue though, individuals must not blindly follow philosophy in an attempt to craft policy, and instead must independently create good economic governance.