By Simon Johnson, co-author of White House Burning: The Founding Fathers, The National Debt, and Why It Matters To You, available April 3rd
The United States has a great deal of public debt outstanding – and a future trajectory that is sobering (see this recent presentation by Doug Elmendorf, director of the Congressional Budget Office). Yet the four remaining contenders for the Republican nomination are competing for primary votes, in part, with proposals that would – under realistic assumptions – worsen the budget deficit and further increase the dangers associated with excessive federal government debt.
Politicians of all stripes and in almost all countries claim to be “fiscally responsible.” You always need to strip away the rhetoric and look at exactly what they are proposing.
The nonpartisan Committee for a Responsible Federal Budget does this for the Republican presidential contenders. I recommend making the comparison using what the committee calls its “high debt” scenario. This is the toughest and most realistic of their projections – again, a good and fair rule of thumb to use for assessing politicians everywhere.
Under this scenario, Newt Gingrich’s proposals would increase net federal government debt held by the private sector to close to 130 percent of gross domestic product by 2021, from around 75 percent of G.D.P. this year.
This would put us close to Greek levels (before that country’s recently proposed debt restructuring). Comparing debt levels across countries needs to be done carefully; I use the most recent available comparative numbers from the International Monetary Fund (see Statistical Tables 7 and 8). Or you can read the full report.
In contrast, Mitt Romney’s and Ron Paul’s fiscal plans would elevate our debt levels merely to Italian levels (around 95-100 percent of G.D.P.), while Rick Santorum would prefer to end up more like Japan (above Italy but below Greece).
The Republican Party has not always been this way. In fact, for most of its existence the party truly did stand for fiscal responsibility, with its leadership routinely placing a high priority on balancing the budget.
In fact, for nearly two centuries there was a consensus across the political spectrum in the United States, that campaigning on a platform of deliberately boosting the national debt was definitely not the thing to do, at least if you wanted to win an election at any level of government.
For example, toward the end of his second administration, President Dwight Eisenhower was pressed from some quarters to cut taxes in order to boost the election chances of Richard Nixon, his vice president. Eisenhower demurred, preferring to pass on a more nearly balanced budget to whomever his successor would prove to be.
Nixon himself was perhaps the last of the truly fiscally conservative Republicans. It was not that Republicans of that era liked taxes – who does, after all? But the idea that you could sell the electorate on the notion that a responsible politician could assert that plans to cut taxes would “pay for themselves” – and therefore not reduce revenue or increase the budget deficit – had not gained traction.
And the slogan that “deficits don’t matter” also seemed too much of a stretch, even in the troubled 1970s. The budget and its deficit did not get out of control under Nixon or Gerald Ford.
It wasn’t one single Republican who changed the tone of the conventional wisdom on the right. There were several, including Jack Kemp and Ronald Reagan. But one name stands out as a thread that runs throughout the tax revolt that has taken place within the Republican Party – Newt Gingrich.
From his initial election to Congress in 1978, Mr. Gingrich saw how to win votes by cutting taxes and dealing with the consequences later, or not at all. He was a strong voice against the tax increases put forward in the later Reagan years, after the initial tax cuts, and under George H.W. Bush. Mr. Gingrich left Congress in 1999, but the anti-tax movement he helped lead prepared the way for a big surge in budget deficits and national debt under George W. Bush.
To understand more about how deficits got out of control with tax cuts and spending increases during the early 2000s, read more by my Economix colleague, Bruce Bartlett, who called this as it was happening. You might start with this retrospective piece.
Claiming to be a fiscal conservative while proposing policies that will greatly increase the deficit is perhaps the most consistent hallmark of Mr. Gingrich’s politics over more than 30 years.
In some sense, Mr. Gingrich has already captured the Republican Party: the Republican candidates are competing to see who can make the most fiscally irresponsible proposals and get away with it.
Whoever becomes the Republican presidential nominee will be standing on the shoulders of Mr. Gingrich.
An edited version of this post appeared this morning on the NYT.com’s Economix blog; it is used here with permission. If you would like to reproduce the entire column, please contact the New York Times.
The Baseline Scenario 
And this debt amount does not include our unfunded liabilities, or ones personal debt. That would be 15 trillion -vs- 117 trillion plus another 57 trillion dollars folks. Putting the U.S. in the stratusfear compared to Greece, and in real actual trouble kids. You can fool some of the people most of the time, or you can fool most of the people all the time, but you can’t fool all the people all the time.
That’s 57 minus the 15 national. Still bad.
Reagan. Not Gingrich. Reagan.
Stockman said that this was a ploy to cut social programs and he was in position to know.
The Committee for a Responsible Federal Budget is an Orwellian institution. If they were honest, they would title themselves The Committee to Destroy Social Security, Medicare, and Medicaid.
Disappointingly biased post again. You can’t equate Debt-to-GDP in pre-Federal Reserve plans with Debt-to-GDP in post-Federal Reserve plans, as in Paul’s case. The overall budget would be so much lower that such a high ratio is merely an artifact and not at all a signal of irresponsible borrowing. The comments to yesterday’s post, which you seem to have ignored, cleared this up.
The other thing is that this would only happen in the CRFB’s most pessimistic scenario (the scenario that the CFRB claims is their most pessimistic right in the report, but which you treat like it’s the only possible outcome, without mentioning that that part is wholly your opinion). In the “normal” and “optimistic” scenarios, the Paul budget plan would reduce Debt-to-GDP significantly.
I can see Simon’s desperate attempt to sell his new book.
What a hypocrite.
On the one hand, Simon asks us to read Doug Elmendorf discussion about how the US is effectively in the toilet. On the othe hand, Simon made the following comment when asked about excluding US treasuries from the Volker Rule:
“For the EU to be treated as safe as U.S. Treasuries is laughable when they’re restructuring one of their member’s debt,” said Simon Johnson
Yo tubelight simon. US treasuries can only be sold because China is buying……so that their biggest customer can continue buying!!
Just create a title called, Please buy my book, please buy my book!!!
Gingrich has cut quite a swath, hasn’t he? His public life and private life are morally parallel: all for Newt and who cares what you damage.
The thing that really turned the R party was 6 simple words —
“Read my lips: No New Taxes!”
No Republican wants to be a repeat of George H.W. Bush.
Hey Engineer: What did you do? Come back from the dead yourself??
Desi Girl are you allergic to the truth. China holds about 8% of our debt. They are not the only ones buying our treasuries.
http://www.businessinsider.com/who-owns-us-debt-2011-7?op=1
Republicans are either ignorant or liars.
@hslinger, you do know that demand is only created by the marginal buyer right? not your past owners. See the chart below.
so here is the point again about simon’s hypocricy: to push through the poorly drafted Volker rule, he is ok with US treasuries being exempted….while full awareness that in reality, the US Treasury is really bad credit. Bit of Amnesia here? remember, US housing was considered pristine credit in 2005….till the time it was not.
To grant singular exemption to US treasuries from the Volker rule, as Simon suggests, is short sighted and clearly shows a lack of understanding of basic finance.
“Stockman said that this was a ploy to cut social programs and he was in position to know.”
Absolutely right Raven. The USG was thought by Republicans, to be spending too much on social programs. While they couldn’t get the votes to cut the programs, they could get the votes to cut taxes. It you cut taxes enough the Government would go broke. Then the social programs would have to be cut.
“Why wait until we have saved the money before giving the tax cuts? We will just cut taxes now and let the Democrats fix up the mess. They will have no choice”
This tactic is being used in many parts of the world.
A second element is the change in the behavior of the media, who decline to report the boring truth, in favor of exciting conflict. Any casual reader or watcher would have no idea if a proposed plan was fiscally responsible or not.
A third factor was that it required Democratic votes to make it work. And got them.
Sorry “girl” China isn’t buying treasuries or debt right now. Overall debt is determined by the market. When they tire of it, they will let us know. If you try and force them to accept less debt, the market will destroy this country.
Paul’s plan would produce massive debt ratio’s because the economy would contract severely under Paul’s plans leading toward a complete call in of debt as the market would liquidate the United States. Knowing the ‘tribe’ Ron Paul comes from and being around them for awhile, lets just say, you better watch it.
To all the Treasury debt naysayers: yes, it is true that currently China has started taking a lightened strategy towards holding US Treasury debt. But they are still the largest holder, and this is still bad for us right now: (link)
«Stockman said that this was a ploy to cut social programs and he was in position to know.»
That was confirmed in some letters with where the idea was to load the government with debt to force a cut in expenditures to pay off the debt, a cut that then would become permanent as voters get used to a much shrunk public system.
But the plan has mutated, and become instead a LBO of USA federal and local governments, for massive asset stripping.
The logic is to pay out huge “dividends” and “management fees” to high income taxpayers by increasing borrowing enormously, and under-reserving against the future, and then declare in effect chapter 11 for federal and local governments and use that to:
* fire a large number of public workers;
* cut every expenditure and social security in particular;
* have a firesale of public assets to the rich whose taxes have been cut;
* raise taxes a lot on lower income taxpayers to pay back the debt.
Two of the best tricks to achieve the LBO and chapter 11 of federal and local governments have been:
* Borrowing the Social Security surplus to fund the Bush tax cuts, and then renege on paying Social Security arguing that the loans from Social Security are “just IOUs”, and federal assets will be sold at firesale prices to pay the other debt.
* Putting most local government pension funds into the stock market, driving up prices and allowing massive capital gains for insiders, and assuming 8% yearly returns, and using the assumed returns to declare pension contribution holidays to fund massive local tax cuts; when the 8% returns don’t happen, cut pensions, raise fees and slash local government spending, and sell local assets at firesale prices to local “machine” bosses and their sponsors.
The “aspirational” middle classes are totally happy with these goals because they think they will get massive tax-free capital gains on their 401ks and their real estate, because they haven’t figured out the endgame.
As Frum recently wrote:
http://nymag.com/news/politics/conservatives-david-frum-2011-11/index4.html
«In the aftershock of 2008, large numbers of Americans feel exploited and abused. Rather than workable solutions, my party is offering low taxes for the currently rich and high spending for the currently old, to be followed by who-knows-what and who-the-hell-cares. This isn’t conservatism; it’s a going-out-of-business sale for the baby-boom generation.»
As I see it, after reviewing a History of the U.S. Debt Balance year by year,
the problem is that we haven’t finished paying for the Civil War.