Mea Culpa

The guilty men

I find it very difficult to say anything bad about the Republican party. After all, this is the party which was founded to eliminate the original sin of the United States; slavery. It is the party which fought the racist Jim Crow laws of the southern Democrats and pushed, against opposition from Democrats in Congress, for an anti lynching bill. It is the party which, through Robert Taft, Barry Goldwater and Ronald Reagan, stopped the onward march of collectivism, proved Marx’s ‘laws of motion’ to be the fantasies they were and defended the liberal freedoms of the enlightenment.

But the GOP is going to have to offer up a few mea culpa’s. The mid terms of 2010 and the Presidential election in 2012 are likely to be focused on the dire state of the American economy. If the GOP are to fight the spendaholic suicide of the Democrats in the White House and Congress they need to make a confession; they are partly responsible.

In 2001 the American economy was reeling from the twin shocks of the bursting of the dot com bubble in stocks and the 9/11 attacks. As a new book by Charles K Rowley and Nathanael Smith* shows, during the 1980’s the tight monetary policy of Paul Volcker’s Federal Reserve offset the loose fiscal policy of the Reagan deficits. In the 1990s, by contrast, the loose monetary policy of the Greenspan Fed was offset by the tight fiscal policy of the Congressional Republicans. “So, in the two decades before 2000”, Rowley and Smith write, “fiscal and monetary policies tended to offset each other, and were never both expansionary at the same time.”

In reaction to the shocks of 2001 this was changed. Bush Jnr embarked on a massive program of Keynesian stimulus spending. From a budget surplus of $236 billion in Clinton’s last year in office the Federal budget plunged into deficit to the tune of $413 billion in 2004. As is commonly held, this was not the result of tax cuts. As Rowley and Smith point out “Tax revenues and social insurance contributions in 2007, at $13,866 per capita, were higher than their 2000 levels”. From 1992 Federal spending per capita held steady at $12,500 per annum. From 2001 it began climbing by 2.45% per annum climbing to nearly $15,000 in 2008….Dick Cheney defended the ballooning deficit with the ludicrous assertion that “Reagan proved deficits don’t matter”. But, as we’ve seen, Reagan’s deficits were offset by the monetary tightness of the Federal Reserve. No such restraint was offered by Alan Greenspan. Over the course of 2001 the Fed Funds Rate was repeatedly slashed from 6.25% to 1.75%.

These Keynesian mistakes led directly to the current mess. From mid 2004 Greenspan began trying to mop up some of the money he had sprayed around to soften the landing of 2001. By mid 2006 the Fed Funds Rate was back up over 5% and many Americans, who had taken on the adjustable rate mortgages Greenspan himself had recommended in early 2004, found themselves unable to keep up repayments. The rest, as they say, is history.

Out of simple honesty the GOP needs to acknowledge the disastrous economic policies of the Bush administration. But aside from offering up a dose of humility which could be a welcome tonic to the hubris and arrogance of Obama, Pelosi and Co, this would offer an opportunity for the Republicans. When looked at more closely we see an object lesson in the downside of crude Keynesianism and a warning of a grim future stemming directly from this administrations woefully misguided policies.

Bush’s expansionary fiscal stance was mild compared to Obama’s eye watering $1.6 trillion deficit forecast this year. The Fed Funds Rate, at a range of between 0% and 0.25%, is lower than even Greenspan dared go. And we saw where that got us. The recession of 2001 – 2002 was one of the shallowest on record but this was bought with Keynesian policies at the price of the greater meltdown we face now. But then Keynes himself, the intellectual giant so much back in vogue, simply shrugged his shoulders when faced with this and famously declared “In the long run we are all dead”.

Well Keynes might be but we are stuck with the fallout of such glib, short termist thinking. The philosopher George Santayana wrote “Those who cannot remember the past are condemned to repeat it”. Remembering the doomed Keynesian policies of the Bush administration might be difficult for Republicans going into elections. But if the American economy is going to return to the growth and job creation which is the source of real, long term prosperity, the failure of these policies needs to be highlighted. And if they can prove they have learned from their mistakes, the GOP might be best placed to make the case.

* ‘Economic Contractions in the United States – A Failure of Government’ by Charles K Rowley and Nathanael Smith

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