Following World War II, there were two things that kept the U.S. budget deficit under control: the fiscal responsibility of the Republican Party (and conservative Democrats) and fear of inflation.
For Republicans, deficits were the greatest sin of government. President Herbert Hoover even made the Depression worse by trying to balance the budget. Democrats correctly argued for deficit spending during recessions, but until the Clinton administration, they ignored the other principle of Keynesian economics that required surpluses during good times. One of the reasons the country faces grave fiscal problems today is that during the Bush administration, Republicans abandoned their commitment to fiscal responsibility by instituting tax cuts, embarking on two costly wars and passing a government- subsidized prescription drug plan (Medicare D) without paying for it. They never tried to balance the budget.
Normally, inflation would have resulted from these deficits and easy money policies, as it did during most of the postwar period. Wages and prices would go up until the Federal Reserve Board cut the money supply, bringing about a recession.
What was different in this crisis was the lack of inflation in response to deficit spending. Some credited the Federal Reserve for this miracle, but a more substantial reason was globalization. Cheap imports kept prices down, and the fear of losing jobs to outsourcing kept wages from rising. The Chinese were happy to lend us money; so interest rates did not go up, even though consumers and the government were both spending beyond their means.
Inflation appears to have been channeled into the one area unaffected by globalization: housing. When housing prices went up, we did not call it inflation; we thought we were getting richer, at least if we owned a home. Home equity loans let us tap this ephemeral wealth. When the housing market collapsed, it brought everything down with it.
Where do we go from here? During a recession you do not try to balance the budget. But there has to be a realistic long-term strategy for paying down some of our debt. Let no one fool you. Deficit reduction is going to be extremely painful. There is no easy solution. The administration’s deficit-reduction plan is a bare beginning. As a nation, we were irresponsible and foolish, and now we are going to have to pay for it. Nothing can be exempt from budget cuts, whether it be Social Security, Medicare or spending on defense and education. Tax increases must be on the table.
Congress appears to be incapable of dealing with long-term problems, like the deficit or global warming. Our constitutional system of checks and balances makes it much easier to stop something than to do something. Every member fights for his or her district, interest group or campaign contributor. With members unwilling to take the long view and sacrifice for the common good, Congress is gridlocked (see our editorial, “Dysfunctional,” 2/15).
One way out of the current impasse would be to create a statutory commission with the authority to draw up deficit reduction legislation that must be voted up or down by a majority in Congress without amendment. Legislation enacted under such constraints would give legislators cover to do what is right but painful. Members could tell their constituents and donors that there was no way to save their slice of the pie. Unfortunately, the Senate rejected such a commission in January without offering any other way toward fiscal responsibility. In response, the president announced that he would appoint a commission by executive order, but it would have the power only to make recommendations and thus could prove ineffective. The House, however, where tax bills constitutionally originate, should try to give the president’s commission a congressional mandate.
Earlier generations of Americans were willing to make difficult decisions to ensure a brighter future for their children. As a nation, they sacrificed and paid taxes to build infrastructure and win wars. What is missing in the country today is this sense of responsible patriotism, which recognizes the obligation to make such sacrifices. Instead we have spent and consumed with insufficient attention to how our habits would affect future generations. No doubt, wage stagnation played a role too, as middle-class homeowners sought additional income from their homes. Yet we cannot exempt ourselves from the responsibility to address the crisis at hand.
It is easy to blame the gridlock in Washington on politicians, but unless politicians hear from the American people that they are willing to make sacrifices for the future of their children and the nation, then the gridlock will continue until the country finds itself in economic freefall.