This blog article returns us back to Glenn Beck’s “Broke.” The focus of today’s article is on chapter #8, the second to last chapter of Section #1 of the book. Remember Section #1 of the book deals with how the U.S. became broke. This chapter deals with the 1980s and 90s and the contributions of Reagan, Bush (George H.W., not Dubya) and Clinton. Let us begin

Chapter #8: Reagan, Bush and Clinton – Read My Lips: Massive Increases in Debt

During the 1960s and 1970s the times were tough with many crisis, conflicts and a severe recession. When the 1980s entered in our history there was so much pessimism many agreed the U.S. needed a change . People expected that it would get tougher in the future and started to demand accountability and responsibility from both their neighbors and the government. To this end, the people kicked out Jimmy Carter after one term in a not so close election against Ronald Reagan. Reagan announced, “Government is not the solution to our problems. Government is the problem. From time to time we have become tempted to believe that society has become to complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. But of no one among us is capable of governing himself, they who among us has the capacity to govern someone else.” Progressives had failed to deliver on its promises with government services with no costs attached. American were also more willing to let the government take more and more power. Polls throughout the 1960s and 70s showed that people were growing ever wary of a government growing too powerful. Reagan started to change the mindset of the people with his eight years in office (Beck 93-95).

Many people talk about Reaganomics but few can actually explain what it was or its purpose. Most people associate it with the idea of Trickle Down economics. Reagan’s economic plan had four major parts. First, a restrictive monetary policy to stabilize the value of the dollar and end inflation. Secondly a twenty-five percent tax cut on all income levels. Third, the promise to balance the budget through domestic spending cuts and controls. Fourth, an agenda to ease government regulation (Beck 95).

Reagan was successful at parts one and two. In one year, the federal funds rate (rate institutions lend each other overnight) doubled up to twenty percent. The tax cuts that were for all U.S. citizens, not just the rich, did exactly as it was intended to do: bring back economic growth. The gross domestic product grew for the rest of the decade. Federal revenues from taxes also increased by nineteen percent faster than inflation. Adjusted for inflation tax revenues increased thirteen percent despite restrictive monetary policies. Some claim that federal revenue fell because the economy and the GDP grew too fast so that federal revenue actually fell. The whole point of the system was to lower taxes, encourage working, saving, investing and productivity, all needed for economic growth. What was the results of Reaganomics? (Beck 95-96)

First, the economy grew at an average rate of 3.4 percent a year. Secondly, inflation decreased from 12.4 to 4.4 percent. Third, unemployment decreased from 7.1 to 5.5 percent and 15.5 million new jobs were added to the economy.  Fourth, the prime interest rate decreased by one-third. Fifth, productive increased by fifteen percent . Sixth, the S&P 500 average increased by 124%. Seventh, charitable contributions increased 57% faster than inflation (Beck 96).

The last two parts of Reagan’s economic plan were not so successful. The battle of economic philosophy over the last hundred years has been between Adam Smith and Lord Alfred Keyes. The problem that we see is that Presidents can often convince the public that tax cuts are good for everyone, including government revenues (Coolidge, Truman, Kennedy, Reagan and Bush 43 were all good at this part). But most people forget the second part of equation: cutting spending. Reagan never came close by running deficits every single year, he doubled the national debt. Why did Reagan ignore the second part of the equation for the same reason every president has, it’s basically of their hands. The Congress controls the purse strings of the government, not the President. Reagan wanted to take whacks at parts of the New Deal and the Great Society, but he thought it was too politically risky and immune from cuts and reform. Though, Reagan did seek cuts to the budget. With $35 billion in 1981 and more every year. The Congress even offered him a deal: for every dollar you raise taxes, we’ll cut three dollars in spending. Reagan agreed and raised taxes; the Democratically controlled Congress never cut the spending, undermined by special interest politics, the media portraying cuts as undermining the safety net , and his cabinet members protecting their budgets. The biggest road block was national defense, his number one priority (Beck 97-99).

Reagan figured that the battle between the USA and the USSR was a battle of ideologies and the winner would decide the future. He figured the debt would not matter if we lost the Cold War. He created his budgets with these principles in mind. Ed Meese and William P. Clark, National Security Advisor to Reagan explains the President’s reasoning at a heated cabinet meeting: “Look I am the President of the United States, the commander-in-chief; my primary responsibility is the security of the United States… If we don’t have our security, we’ll have no need for social programs. We’re going to go ahead with these [defense] programs.” He would not veto the Democrats domestic spending, so that they would give him his defense spending. He did make attempts to balance the budget with the Balance Budget and Emergency Deficit Control Act that set deficit reduction targets to eventual surpluses, requiring across the board spending cuts if targets were not met. Unfortunately it was more than most politicians could swallow, so they changed the rules (Beck 99-100).

Some analyst argue that Reagan actually cut more spending than previous presidents in the forty-five years before him; spending fell by 9.7% during his first term. Unfortunately Reagan did not do such a good job at reigning in government. He realized like most President’s you cannot cut spending and limiting government without necessary political sacrifice and pissing off a lot of people, but he tried. His vetoes were constantly being overridden. Reagan’s budget director, David Stockman, was one of his most vocal critics, saying that he failed to follow through with his promises of a small government revolution. Reagan’s experience proved that you cannot resolve the problems on your own, the entire nation must be involved. (Beck 100-102).

When Bush ran against Reagan for the Republican nomination in 1980 he claimed his economic plan was “voodoo.” Bush did sign a no new taxes pledge along with his republican congressional mates, but he broke his promise. Like Reagan he brokered a failed deal with the Democratic Congress promising tax raises in exchange for spending cuts. One reason why he may have caved is that Bush was too timid of a man to address the tough political problems. Its more likely that Bush broke his promise because economic growth is hard to keep up and Bush was not a spending hawk like Reagan. He also had some bad luck the recession lowered tax revenues and push up the deficit. He inherited the savings and loan crisis, increases in social security costs, medicare outlays and interest payments on our debt. All of this shows how little power the President has when you consider that entitlement spending and debt interest payments are on autopilot (Beck 103-105).

Answer this question. How can President Clinton be credited with running surpluses between 1998 and 2001 when the national debt increased every single year? This all comes down to how the national government calculates its numbers and the politicians spin the data. Before we can understand how it is that President Clinton claims surpluses, when increasing the debt, we have to understand that all President since Reagan has used this tactic. Clinton was just better at cutting spending to get us close to a surplus (Beck 105). So how did he do it? Let’s explore.

Our federal budget is so complex, but its easier to see how fiscally responsible the president is by looking at the national debt. If there is a true surplus the debt goes down. In 2000, Clinton claims that he paid down the national debt by more than $360 billion in the last three years, but that is wrong. But if you look at the figures of debt from the office of Budget and Management you find the debt started at $4.351 trillion in 1993 and ended at $5.629 trillion in 2000. How did Slick Willie work this one out? Well there are two types of debt and Clinton just focused on one and not the other. (Beck 106-107).

We have two types of debt: debt we owe to investors (public debt) and debt we owe to ourselves (intragovernmental debt); adding these two together give you our total national debt. Clinton focused on public debt, not the intragovernmental debt, because that goes up every year. Here is how he did it. Since 1983 Social Security surpluses are added in with other revenues like income taxes, and not put into a trust for future payouts. Social Security and Medicare tax rates increased from the 1970s through the 1990s creating a large influx of revenue. How did Clinton get his surplus? He counted every dollar of money he “borrowed” from the Social Security trust fund as new income instead of debt. Picture it this way: “You make $30,000 at your job and spent $32,000 on living expenses. Your brother, seeing you having a hard time, loaned you $10,000 and you gave him an IOU in return.” Logic would say that you ran deficit of $2,000 but your personal debt increased by $8,000. Clinton saw it a different way; he claimed that $8,000 left over as a surplus (Beck 107-109).

Clinton does deserve a pat on the back for making progress, but he built his success on these three sources: defense spending decreased (The peace dividend), tax revenues increased (Tax and tech divided), interest on the debt decreased by 1% of GDP (The Interest dividend) and Congressional gridlock. The peace dividend benefited Clinton because there were no major wars to fight, so we had no enemy to defend against. Defense spending decreased from 5.2% to 3% of GDP. If Clinton had not had this benefit the “surplus” would be $200 billion less. The Tax and Tech dividend is that tax revenues surged due the cut in the capital gains tax in 1997. Also new businesses were popping up all because of the technological revolutions of that time period. The booming economy increased tax revenue to a record 20.6% of GDP, but this did not last forever, and the next President Bush got the blame for the tech bubble bursting, even though it happened on Clinton’s watch. The Interest Dividend created savings because we had smaller deficits due to increased tax revenue and decreased defense spending, and lower interest rates due to people investing in the U.S. The biggest accomplishment is that government got out-of-the-way because the gridlock in the divided government prevented more expensive programs from being passed. The do nothing Congress and President was the best thing for our economy and budget (109-110, 111).

There were also some positive reforms in capital gains taxes, welfare and elimination of farm subsidies (that favor the rich and not farmers). Gingrich and Clinton tried to work together to rein in social security and medicare costs but six days before Clinton was to reveal it in the State of the Union the Monica Lewinsky scandal broke and all efforts at bipartisanship to fix the entitlement system weighing us down failed. Unfortunately the next two Presidents to continue to kick the can down the road and run it off of a cliff.

The next chapter of the book focuses on the contributions of George W. Bush and President Obama to our state of being Broke.

Questions? Comments? Concerns? Class dismissed!