Today, thousands of tea partiers rallied around the country to protest, among other things, taxes. While President Obama followed through on a pledge to cut taxes for 95% of Americans on top of the irresponsible Bush tax cuts, and the tax burden today is not historically high, and even a majority of tea partiers say their taxes are fair, many in the tea party crowd right argue that sky high deficits (even though they have begun to fall; thanks to higher revenues and TARP profits) will mean a greater tax burden in the future, with much of it falling on our children and young people.
The deficit is nearing double digits as a percentage of GDP, and total debt as a percentage of GDP is expected to rise from 66 percent before the outbreak of the financial crisis in 2007 to 98 percent this year. This means higher future taxes for everyone.
Some of us didn't go to a tea party because we didn't care to be a part of a far right rally. A recent CBS poll finds that tea partiers are nothing but very conservative Republicans: 73 percent are conservative, 95 percent are Republican or independent, and 88 percent disapprove of Obama, but most have favorable views of the Republican Party, Glenn Beck, and Sarah Palin.
But just because we aren't in the tea party, it doesn't mean we can't be angry at the size of the federal deficits. And we are. Our anger just isn't broadcast wall to wall on cable news.
Where the tea partiers go wrong is not their complaints about future taxes but their pinpointing of the cause of deficits and bailouts
It goes like this. In January 2001, George Bush inherited an economy with the CBO projecting surpluses as far as the eye could see. In its January 2001 Budget and Economic Outlook, the CBO projected a surplus of $5.6 trillion from 2002 until next year (2011). Back in 2000, the debt held by the public was only $3.3 trillion. The total debt, including debt owed by the government to itself, was only about $5.6 trillion. That means that, had 2001 baseline projections held up, under 2001 policy assumptions, the entire national debt built up since 1835 could have been paid off by now.
Granted, the picture in January 2001 was too rosy because the Internet bubble was not done bursting. But Bill Clinton, who had inherited what was then the worst budget deficit by far in US history, had clearly turned things around. Even taking into account a recession in 2001, a number of actions taken by the subsequent Bush administration as we now know significantly worsened the situation.
First, the 2001-03 Bush Tax cuts, or Economic Growth and Tax Relief Reconciliation Act of 2001, and Jobs and Growth Tax Relief Reconciliation Act of 2003 cost taxpayers $3.9 trillion over the ten years to 2014, according to the Center on Budget and Policy Priorities (it's funny that we've only begun to talk about deficits in terms of 'cost to taxpayers' now that we're in the Obama era; back in 2001-03 it was portrayed as a free giveaway to taxpayers, just as ARM mortgages were portrayed as free giveaways to naive borrowers). Those making over $1 million received an average tax cut of $125,000, while those in the middle 20 percent received an average tax cut of $647.
Then there were the wars in Iraq and Afghanistan,
Just two policies dating from the Bush Administration — tax cuts and the wars in Iraq and Afghanistan — accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits in 2009 through 2019
Then there is Medicare Part D, which the CBPP writes,
In short, we did not include the costs of the prescription-drug program in this analysis because we could not estimate those net costs with the same confidence that we could estimate costs, based on CBO analyses, for other Bush-era policies — namely, the tax cuts and the wars in Iraq and Afghanistan. ... Nevertheless, it is clear that, as noted above, enactment of the prescription-drug program added materially to the deficit that the current administration inherited.
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But all of the above pales in comparison to the off budget problems created during the Bush years, namely, the housing bubble. And although Bush was President and certainly allowed, encouraged, and benefited from the housing bubble, he was not the prime originator of the housing bubble. The bubble actually began way back in 1998, the same year as the Internet bubble, one year after the 1997 capital gains tax cut on housing, as this chart makes clear. Similarly, as Clinton certainly allowed, encouraged, and benefited from both the housing and Internet bubbles in the final two years of his term, he cannot be said to be the main originator.
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The causes of the economic crisis have been debated endlessly. Too much confidence in housing-- deregulation-- the global savings glut-- too low interest rates. But what brings all of the pieces together is that the American establishment was far too enraptured in the triumphalism of the Reagan revolution. Bubbles-- either in housing or elsewhere-- could not be stopped because the Chicago School of economics was telling us there was no way to spot one. Deep economic recessions were a thing of the past because globalization and union busting had led to "productivity improvements" and because Alan Greenspan was a genius. Regulation should not be taken seriously because the free market would regulate itself. The only problems possible were the problems of the pre-Reagan 1970s (consumer price inflation as measured by CPI), and therefore the Fed was all clear to keep interest rates at 1% 3 years into an expansion. The Asian savings glut after the region had been burned by the 1997-98 financial crisis was seen as something that could not afflict the West, even as we accepted massive current account deficits and borrowed the difference.
In short, the housing bubble was sustained by overconfidence in Reaganism and that Reaganism had solved the world's problems. The end of the Cold War and the failure of communism had proved that. Crisis after crisis in emerging markets, a deep solvency crisis in Japan, and a deep depression in post Soviet Russia were ignored. We had entered "the Great Moderation" (except in asset prices). Borrow, borrow, borrow! Leverage, leverage, leverage!
Economists Kenneth Rogoff and Carmen Reinhart have studied hundreds of financial crises, and they find that
The aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes
Source
The above is from a study of average post-World War II major banking crises. Meanwhile, the Bush administration, which as we remember came into office with the CBO projecting surpluses over ten years equal to the total size of government debt, bequeathed Obama with the worst banking crisis since World War II, worse than any in the Rogoff/Reinhart study.
Had average results for banking crises been repeated this time, the unemployment rate would have risen from 4.6 percent in 2007 to 11.6 percent peaking in 2011; instead it peaked at 10.1 percent in October 2009 and is unlikely to reach 11 percent. In an "average" banking crisis, GDP would have fallen 9 percent from peak to trough at the end of 2009; instead it has fallen less than 4 percent from peak to trough. In an "average" banking crisis, debt to GDP would have risen from 66 percent in 2007 to add another 86 percent to a total of 162 percent; instead it is projected to peak at about 101 percent in 2012.
In short, Obama was handed the worst post-World War II banking crisis and delivered a recovery faster, unemployment lower, and government debt lower than in the average post-World War II banking crisis.
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Nonetheless, I, too, am angry about the surging deficits that we now face, which are no laughing matter. I feel the tea partiers' rage; their disappointment. I know what they mean when they say that they're 55 years old and have never seen anything like this. I'm not 55 yet but I never expected to see anything like this. Not in America. Not after the lessons of the Great Depression.
Only the tea partiers' rage is directed in the wrong place. They should be protesting in front of the Chicago School of Economics, who told us that bubbles couldn't be identified. They should be protesting in front of Alan Greenspan, who said that markets should regulate themselves and kept interest rates too low. They should be protesting at the IMF and others, for advocating capital account liberalization and contributing to emerging market financial crises in the 1990s which turned into savings gluts in the 2000s. And most of all they should have been protesting all this in 2003, 2004, and 2005, when the trouble was actually brewing, rather than today, when the problems have been clear for all to see but it is too late to the save it.
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Perhaps the only thing that gives me hope is the belief that we will recover. And when we recover, we will be in better shape than we were before the crisis, because the myths of constant housing appreciation, the myth of deregulation, the myth of the 'Great Moderation', the myth of the virtue of borrowing, and the myth of the invincibility of Reaganomics, will finally be dead. It won't take a financial reform bill to do that (although I hope a stronger one passes), because it has already happened. Our growth today, unlike our growth in 2003-07, will not be based on home equity withdrawal, and its implication, constantly expanding consumer credit. Therefore, it will prove more durable, and more long lasting, over time.