Tag: john steele gordon

The Debt Ceiling and the Balanced Budget Amendment

The Washington Post editorializes:

A balanced-budget amendment would deprive policymakers of the flexibility they need to address national security and economic emergencies.

A fair point. Statesmen should have the ability to “address national security and economic emergencies.” But the same day’s paper included this graphic on the growth of the national debt:

National Debt

Does this look like the record of policymakers making sensible decisions, running surpluses in good year and deficits when they have to “address national security and economic emergencies”? Of course not. Once Keynesianism gave policymakers permission to run deficits, they spent with abandon year after year. And that’s why it makes sense to impose rules on them, even rules that leave less flexibility than would be ideal if you had ideal statesmen. Indeed, the debt ceiling itself should be that kind of rule, one that limits the amount of debt policymakers can run up. But it has obviously failed.

We’ve become so used to these stunning, incomprehensible, unfathomable levels of deficits and debt — and to the once-rare concept of trillions of dollars — that we forget how new all this debt is. In 1980, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 30 years later, it’s sailing past $14 trillion.

Historian John Steele Gordon points out how unnecessary our situation is:

There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. But while the national debt in 1982 was 35% of GDP, after a quarter century of nearly uninterrupted economic growth and the end of the Cold War the debt-to-GDP ratio has more than doubled.

It is hard to escape the idea that this happened only because Democrats and Republicans alike never said no to any significant interest group. Despite a genuine economic emergency, the stimulus bill is more about dispensing goodies to Democratic interest groups than stimulating the economy. Even Sen. Charles Schumer (D., N.Y.) — no deficit hawk when his party is in the majority — called it “porky.”

Annual federal spending rose by a trillion dollars when Republicans controlled the government from 2001 to 2007. It has risen another trillion during the Bush-Obama response to the financial crisis. So spending every year is now twice what it was when Bill Clinton left office. Republicans and Democrats alike should be able to find wasteful, extravagant, and unnecessary programs to cut back or eliminate. They could find some of them here in this report by Chris Edwards.

In the Kentucky Resolutions, Thomas Jefferson wrote, “In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.” Just so. When it becomes clear that Congress as a body cannot be trusted with the management of the public fisc, then bind them down with the chains of the Constitution, even — or especially — chains that deny them the flexibility they have heretofore abused.

A History Lesson for Trade Bashers

Candidates from both parties are trying to win votes this fall by criticizing free trade and trade agreements. As John Steele Gordon points out in a wonderful historical essay, “The Great Mistake,” in the latest Barron’s Weekly:

We’ve been down this unfortunate road before. Recall the Smoot-Hawley tariff, named after its chief congressional sponsors, Sen. Reed Smoot of Utah and Rep. Willis Hawley of Oregon, both Republicans and both chairmen of the committees in charge of taxes.

Introduced in 1929 as the country was tipping into recession, their bill did not have a happy ending. It imposed steep tariff increases on agricultural as well as manufactured goods, raising overall U.S. tariffs to their highest levels in decades. When President Hoover reluctantly signed the bill in June 1930:

The stock market, once again a leading indicator, immediately turned south. It wouldn’t stop falling for two years—the Dow Jones Industrial Average gave up all its gains since its inception in 1896.

Other countries made good on their threats of retaliatory tariffs, and world trade collapsed. American exports had been $5.24 billion in 1929. Three years later U.S. exports were worth only $1.16 billion, a 78% decline. The Smoot-Hawley tariff would prove to be one of the major government mistakes that converted an ordinary recession into the calamity of the Great Depression.

The protectionist bill was bad politics as well as bad economics. Hoover, Hawley, and Smoot were all swept out of office in 1932.