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May 11, 2014
David Warsh, Editor


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Searching for a New Direction

What might a successful Democratic presidential candidate in 2016 look like who is not Hillary Rodham Clinton?  The Republican Party can’t be expected to field a successful mainstream candidate until some of its serious kinks have been worked out – at least another cycle or two.  This time the Democratic Party nominee is more than likely to win. What happens after that depends on who that candidate is.

The former Secretary of State has had a splendid career since striking out on her own as a senator from New York in 2001. It would be good to have a woman president.  But, to my mind, Clinton is too tied to battles going back to 1992 and before to hope that, once elected, she could win over her many critics and steer the nation back towards consensus.

A non-polarizing rival for the nomination might look like Bill White. He’s a personable fellow, 59 years old, a former litigator, oil and gas entrepreneur, deputy secretary of energy (1995-97), real estate developer, and successful three-term mayor of Houston, the nation’s fourth-largest city. His candidacy might  have seemed a logical possibility, except that he was defeated by incumbent Rick Perry in the Texas gubernatorial election in 2010, the year of the Tea Party.  End of story, at least on the surface.

Mainly, I think of White because he has written a book, America’s Fiscal Constitution: Its Triumph and Collapse (Public Affairs, 2014), which seems to me like a very promising platform for a Democratic candidate. White has zeroed in on the long-term federal borrowing crisis that affects every aspect of America’s future role in the world. He has placed it, credibly, in historical perspective. That in turn demonstrates a deep political intelligence.

“To understand what recently has gone wrong,” he writes, “it helps to know what had once gone right.” Five  times in the past the United States has found itself deeply in debt:  after the American Revolution, the War of 1812, the Civil War, World War I, and the sixteen hard years of the Great Depression and World War II.

In each case the US borrowed for a clear and generally agreed-upon purpose: to preserve the union, to expand and connect its borders (the Louisiana Purchase, in particular), to wage war, and to compensate in severe economic downturns, beginning with the Panic of 1819. In each instance, relying on a political tradition that White traces to budgetary procedures instituted by the Founding Fathers, Congress found the political will to pay it down afterwards – until 2001.

Then, says White, the 220-year-old fiscal tradition collapsed.  The federal government cut taxes and borrowed to pay for two wars, and a rising proportion of its domestic operating expenses as well. George W. Bush took office pledging to reduce the national debt by $2 trillion and create a $1 trillion rainy-day fund.  Instead he increased the debt by fifty percent, from $5.7 trillion to $9 trillion – before the Panic of 2008!

In the long and deep recession that followed,  federal debt exploded, to $16.7 trillion last year, or something like $120,000 for every working American.  Debt coverage, the measure banks commonly use to judge credit-worthiness of businesses and individuals, rose to nine times the revenue available to pay the debt.

America’s Fiscal Constitution is gracefully written, but it is not an easy read: 410 pages of narrative, with another 150 pages of notes, bibliography and tables, and only three charts in the entire book to illustrate the argument. White describes in some detail each prior episode of borrowing and, with a politician’s eye, the hard legislative compromises and monetary policy accommodations that were subsequently required to restore the tradition of more-or-less balanced budgets.

None of these chapters is better than the set-piece with which the book begins – the 1950 battle between President Harry Truman and Republican Sen. Robert Taft over tax cuts on the eve of the Korean War, contrasted with the collapse of the tradition of fiscal responsibility in 2003, as the US prepared to invade Iraq.

So what happened in 2001?  White sees the loss of discipline as having happened in two stages.  The first he traces to the run-up to Ronald Reagan’s election in 1980.  Traditionally the GOP had campaigned on promises to maintain balanced budgets. He describes the role of Congressmen David Stockman of Michigan and Jack Kemp of New York and Wall Street Journal editorial writer Jude Wanniski in fomenting a competition between two Santa Clauses – Democrats who delivered more services, and Republicans who delivered lower taxes. That lowering of taxes, it was promised, would pay for itself by stimulating growth.

Candidate George H.W. Bush, soon to be vice president, saw “voodoo economics” Gradually, Ronald Reagan envisioned a “supply-side revolution.” White writes, “Never in the nation’s history had a president proposed large, simultaneous spending increases and tax cuts when the federal budget already had a deficit.”

But Reagan was more nearly a fiscal conservative than a heedless spender, White notes.  He expected higher inflation to make up for lost revenues by carrying taxpayers into higher brackets. And he gave his blessing to an historic rebalancing of the Social Security trust fund.  Not until George W. Bush arrived in 2001 was traditional discipline truly lost.

Presented by the Clinton administration with a budget surplus accumulated through a combination of savvy policies (tax increases combined with monetary easing) and good luck (the Internet boom), Bush immediately sought tax cuts, explaining that the resulting deficits were “incredibly good news” because of the “straitjacket” they imposed on Congress. The straitjacket notwithstanding, Bush went to war first in Afghanistan and, two years later, in Iraq. Congress cut taxes again. “Nothing is more important in the face of war than cutting taxes,” explained House Majority Leader Tom DeLay of Texas.

What accounts for this sixth great spike in borrowing, unaccompanied by any of the traditional rationale?  The great advantage of White’s argument from history is that it underscores how weighty must be any satisfying explanation for the current mess. Oedipal rivalry in the Bush family is a non-starter.

My own preferred suspect is the entry into civic discourse of claims to authority derived from scientific economics in the years after World War II  This occurred gradually, first in the guise of a “Keynesian Revolution” which put “demand management” through deficit spending at the center of the conduct economic affairs; then in the form of carelessly-conjured “supply management” of the economy through tax cuts.  Plain old political pandering played an even larger role.

White, a Democrat, carefully delineates the counter-revolution, but he has little to say about the rise of the “New Economics,” except to note that when John F. Kennedy, in a memorable commencement speech at Yale University in 1962, urged young Americans to develop fiscal policies based on “technical answers, not political answers,” a Gallup Poll a few weeks later found that 72 percent of Americans opposed tax cuts financed by debt. Nevertheless, “guns and butter” policies of the Vietnam War followed.

I have nothing against technical economics; indeed, writing about it is how I make my living. Its findings, large and small, have greatly improved the lot of billions of persons around the world over the last eighty years. But I do think that its claims to authority, especially in public finance, have been somewhat overstated in recent decades, in contrast to the common-sense strictures of the American fiscal tradition whose two-hundred-year arc White describes so clearly.

White identifies four time-honored conventions whose return would begin to solve the problem of today’s massive debt: clear accounting; “pay as you go” budget planning; separate budgeting for government trust funds; and explicit congressional authorization for each new debt.  Is such an extensive simplification politically possible?  Certainly not at the moment.

Might Bill White play a Perot-like role in the 2016 election?  I have no idea, though I hope so.  I do know that the search for alternatives to Hillary Clinton will continue. People will say that the hope for a new and transformative figure is what brought Barack Obama to office in 2008. In my opinion, the strategy has worked pretty well, for all the acrimony.  It is simply taking longer than had been hoped.

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