The Reagan Consensus - part 6

The Reagan Consensus and its Enemies -

Another threat to the Consensus is the Debt. No, not consumer debt, which is usually paid off without taxes and, after all, represents spending done voluntarily billions of times for the things we want or often need. No one worries about whether the "shelf" of private debt will overwhelm the economy even a year from now precisely because most of us will have paid it off or completely secured it (in the case of real estate or automobiles) as soon as our next credit card statement comes in. The Great Recession of 2008 was not caused by conventionally secured commercial or consumer debt. It was caused by profligate mortgage policies that many of us warned would hurt the economy and that were legislated and enforced by government (e.g.: Fannie Mae, Freddie Mac and the Carter Urban Loan programs).

For the first time in living memory and before COVID, the US and other nations were racking up enormous deficits and thus piling up debt without the excuse of an emergency or a war and, in  the case of the US, in the midst of a lengthy economic recovery and then a two year long Trump boom. Yes, Trump did not promise to balance the budget or reform entitlements (except for Obamacare, which received no GOP support in Congress) which, as we saw in the last installment, are a double threat to the Consensus. But, it is still a fact that, despite ushering in an unprecedented economic boom, despite having no Cold or Hot War and despite there being no other emergency until COVID, Trump has seen trillion dollar deficits racked up every year of his presidency.

The fact that his predecessor was at least as bad (after excoriating his predecessor as "unpatriotic" for compiling half the debt he amassed) is not an excuse for this record. However, it should be noted that quirks in the US political system established not so long ago, like the Senate's appropriations filibuster and the Budget Act of 1974, have made it hard for any POTUS to tackle this problem. The rules and laws brought in referred to have taken away his power of impoundment, his pocket veto (where one can kill one bad bit of spending without vetoing the whole budget) and his ability to avoid a government shutdown even when he holds majorities in both Houses of Congress. For example, even when the GOP controlled Congress, they refused proposed budget cuts Trump made and voted higher spending than he asked for. 

Why is all of this important? Many point out that, despite all, the US level of debt is not as bad as other countries in the West and not as bad as others in history, including the US. How is this a threat to the Consensus? The primary problem is that this overhang of debt will one day need to be paid off in the form of taxes which would afflict future generations' standard of living and discretionary income disastrously and, in turn, impair and derange the virtuous circle of the Consensus.

But there is also what can be called the "crowding out" effect. As the state borrows more, it denies the private sector the capital it needs to grow, to innovate and develop, all critical ingredients of the Consensus. The opportunities lost by this effect are countless and also often irretrievable.

Finally, the larger the public debt just as the larger the state, the more the state is able to extend its tentacles into business and even the lives of individuals that squashes not only economic promise but also personal freedom and ultimately the Rule of Law. A perfect example of this (which also harkens back to the danger to the Consensus of the cynical political use of the big Crisis) is when President Obama bullied the Car Companies' creditors into surrendering their right to sue to protect their financial interests in those companies. (Here in fact we have an example of three of the threats to the Consensus all wrapped in one: Dependency, in the form of subsidy and bailout for two enormous companies, the use of Debt to create that Dependency through TARP and, of course, the Big Crisis that set off the "need" to intervene to "save" two of the Big Three rather than just let them fail like is the rule in other industries when a company is anemic and losing.) In this case, the freedom of the creditors to run their business affairs as they deem fit was sacrificed for "the greater good", ill-defined and narrow as it was, while the Rule of Law was trampled in denying them their rightful legal remedies (and, even worse, resulted in a payoff to the very unions who had helped to ruin the companies in the first place).

Debt makes government MORE powerful not less powerful. It helps to crush the entrepreneurial spirit both morally (as in the absent "Moral Hazard" rule in bailing out the Big Banks in 2008 as "too being too big to fail" despite their authoring the disaster themselves in tandem with the Federal Government) and materially as the Debt shuts off more and more credit that could have been used to breathe life into private initiatives and ventures. Indeed, an ironic impact of the Bank and Consumer Credit "Reform" and "Protection" laws passed in response to the Great Recession was that, even as the Government and the Federal Reserve respectively incurred more and more public debt and expanded its portfolio of investments in the economy, credit became harder to get for business and individuals.

The net impact of too much debt (as a moderate level of government debt for necessary or "consensus" elements of state activity such as defence, education and infrastructure, is tolerable and even desirable and useful) is thus severely deleterious to the strong enterprising dynamics of the Consensus that makes it such an elixir for an economy. It needs to be controlled or paid off if already ruinously incurred. How to deal with what may be seemingly an insurmountable fiscal mountain? There are two approaches conservatives must take - one for the short term, one for the long term. (And here, despite the Obama and liberal propaganda to the contrary, you can cite Hamilton as your authority for deploring high levels of debt!)

In the short term, the answers include modest spending cuts. I say modest when I look at two examples. First, the Chretien government's finance minister, Paul Martin, balanced the budget of Canada by simply freezing spending despite the belief of many that it could never be done without severe spending cuts and force majeur laws to reduce public entitlements and benefits. Mike Harris balanced a budget deficit twice as large as the enormous one faced by Ontario today by cutting spending by 10% while cutting taxes by 20%! Further, Senators Lee and Paul recently demonstrated that the huge US federal deficit could be eliminated by only a 1% cut in spending per year for 5 years. A systematic outside audit of government spending can also be undertaken to reduce those infamous triplets, Waste, Fraud and Abuse. The sale of state assets and more privatization can also be good one time boosts to revenue. But, in the end, general spending must be controlled (and soon in light of the COVID Bubble of Debt that has recently ballooned).

Conservatives can also cite supply side economics and the Laffer Curve to show that the budget can and should be balanced not just by spending cuts (and repeat many times that spending is the culprit behind mounting public deficits, not lack of revenue) but by revenue from economic growth from tax reduction and reform. But, in the long term, they must also propose new statutory rules to control against the return of out of control spending and soaring debt and deficit levels. For instance, the removal of baseline budgeting that literally makes it illegal to actually cut spending levels from where they were the year before. Further, balanced budget laws and constitutional amendments with reasonable bands for the fluctuation of spending especially in well-defined emergencies. As well, tackling a big source of government debt (and of natural opposition to the Consensus) - the far too generous pay, benefit and pension arrangements for public sector workers. (Yet, beware "statutory rules" as a panacea - in 1999 as part of setting up the Euro currency Zone, the EU set "convergence" guidelines for the level of debt and deficits acceptable relative to GDP as a condition of membership in the Zone. Today only a handful of mostly small members of the EU have complied and the non-compliant are still allowed to remain in the Zone! Without the political will, there is no way.). Finally, a Sinking Fund based on a portion of any new revenues can be set up to start to reduce the Debt.

Reagan once said that a nation cannot long thrive where 37% of its product is the tax collector's share. The average Canadian now sends 43 cents on the dollar to tax. It was 33 cents when Reagan said those words, in 1964. The mushrooming of public debt, despite tax increases and the addition of several major taxes (including Capital Gains, the GST/HST and the Carbon Tax), since then proves that the answer to combating this threat to the Consensus Reagan helped to forge is to control spending. If this is not done, the economic miracle wrought by the Reagan Consensus will be constantly vulnerable to that fiscal grim reaper of hope, promise and creativity, excessive public debt. If it is not controlled and reduced, it will enable a new financial and political tyranny that may extinguish our freedom and the Rule of Law that protects our liberty.

In the next installment, I will look at where the Reagan Consensus fits into the sweep of History.