Who is to blame for the Depression that we find ourselves in? Some bloggers blame the economic stimulus program of Obama, despite it starting before he became President. Others like to point to Bush, on whose watch the big downturn started. Neither of these pat answers sounds all that great when you think about how much influence a President has on the economy, however. Does a nation this big really turn so quickly?
A little bit of analysis shows that if you have to blame policies from Washington, the best place to go is back a full generation – to Ronald Reagan. There are two distinct inflection points in both National Debt and Balance of Trade – what Democrats like Mike Dukkakis used to call the “Twin Deficits” – that clearly point to policy changes from that time.
How can this all be Reagan’s fault? It helps to understand where the US was in 1981. We had a terrible recession fueled by “stagflation”, a stage of economic cycles where money is worth less everyday but growth is eluding everyone. The Reagan people knew that a dramatic change in how we did business was in order.
What they gave us, however, was a like a shot of whiskey. We felt warm and flush with a bit of “Irish Courage”, but soon demanded a bit more to keep going. It may have made us feel great through the ensuing party but the hangover is nasty.
The shot we received was a government policy bent on two things – constant deficit spending that financed deep tax cuts and a big military buildup, while at the same time promoting a strong US dollar abroad to increase our purchasing power. These were all carefully tied together. Budget deficits put pressure on the Federal Reserve to keep interest rates up a bit, generally raising interest payments and keeping us out of the “Liquidity Trap” that we are in now. A strong military raised the profile of the nation around the world and, along with higher rates and other policies, kept the US Dollar strong around the world.
How big was the increase in deficit? According to zfacts.com, an excellent website that is worth spending a lot of time getting to know, the US Debt as a share of national production was at a 50-year low when Regan took office – but roughly tripled by the time he left. There is also information showing that the old line of BS that Democrats in Congress were responsible is clearly not true at all.
But this isn’t the end of the story by any shot. Our Balance of Trade, long a source of income for this nation, had been running slightly negative at that time – meaning that we bought more from other nations than we produced. By this graph from the St Louis Federal Reserve we can see that from Reagan’s policies onward the strong US Dollar propelled us into a nation that was not just in debt, but shoveling money out to the rest of the world at an ever increasing clip:
To put this in perspective – the current Balance of Trade deficit runs about 1.0-1.5% of all our production, about what would be necessary to take the current rate of economic growth to the level where it would start creating jobs (about 3.3% per year).
How does blaming Reagan suddenly come from nowhere? Actually, it doesn’t. I remember Mike Dukakkis saying in 1988 “We can’t have an economy based on everyone doing everyone else’s laundry.” Clearly, he was correct, at least over the long term. But as we all know now, in 1988 the party was just getting started. The economy had been changed from one that emphasized an honest day’s work and into one where investors could make nearly guaranteed returns forever.
The graphs show the inflection points clearly – and they are all centered right about the time Reagan took office. Clinton’s balanced budget only served to keep the party going stronger, but we picked up right where we left off at the next downturn. It was one Hell of a generation-long bender, put together.
Why is it important to assign blame for this Depression? It’s only useful to the extent that we use the information to change our behavior and get our act together, much like a drunk facing the inevitable morning after. Tax cuts funded by deficit spending were a key feature of Reagan policy and are clearly what got us into this mess in the first place – calling for more is simply denial that we have a problem.
More interestingly, looking at this from the perspective of Dukkakis shows how the Republic / Democrat divide has played out ever since. The Republicans, despite a lot of noise about balancing the budget, have consistently been the party of the Big Party, while the Democrats have been the boring, sour, and ultimately responsible adults. It hasn’t been any fun for the left and the strain clearly shows. We mostly gave up trying to stand up to the loud party long ago.
Who is to blame for the Depression? It took a full generation to being a nation as powerful as the US to the current low state. If you want to know who is to blame, all it takes is a review of the data to see when things changed. It’s pretty obvious. It’s Reagan’s fault – and, of course, our own, for thinking that the Big Party was what we wanted all this time.