2012 will be the 11th time in my
short life that I will be able to participate in the choosing of a president of
the United States. While it may just be me, it seems like each and every
election is cast as the most important election of our time and a defining
moment for the American Experiment. The future of the Republic was being
weighed in the balance, and only the proper outcome (which would of course be
the election of the candidate you supported) would assure its survival. This
week we will continue our meditations on the economic choices that confront the
world, this time focusing on the US.
We will start with a thought
experiment, in which I invite you to think about alternate histories. Just how
important are presidents (or leaders in general) to the success or failure of
the economy? And then how critical is the coming election this fall? We will
assault a few of our most cherished beliefs, both from the left and from the
right. If I do not offend you in the first few pages, I invite you to keep
reading; I will get to you somewhere.
As I continuously argue, the most important issue facing the US is dealing with its deficit, just as that is the defining issue in much of Europe and will soon be in Japan. The longer we put off the decision, the more difficult the task and the more serious the economic impact. Without action, Italy all too soon becomes another Greece, but with real impact. They realize that and are making the efforts. But would it not have been easier for Italy with about 40% less debt-to-GDP? Perhaps not politically, at that time when they should have been working on it, but in hindsight I bet the politicians now wish they had done more. It seems we accept change only in the face of necessity and see the necessity only in a time of crisis (as one Italian more or less put it, long ago).
So we discuss politics, because the
looming debt crisis (and its solution) is at its very core a political creation
and must have a political solution. And once the bond market decides to provide
its own solution by demanding much higher interest rates, it is too late.
That's game over, and a prolonged recession if not a depression will ensue.
I have long maintained that presidents
take too much credit for good economic times and get altogether too much blame
for bad ones. That is not to suggest that they can't make a difference by
promoting certain policies over others. Clearly they can. But I think we might
find, if we think about what might have been if the "other guy" had
been elected, that outcomes would often have been not very different. In fact,
it is often not until after a president is gone that we see the results of his
policies. Let's start with recent history and work backwards.
Let me preface this by pointing out
that we are dealing with just the economic outcomes of the election
of a particular president. I readily admit that other areas, such as Supreme
Court nominees, regulations, social policy, and foreign policy would, perhaps,
change a great deal. These developments are important, and perhaps more important
than mere economic outcomes; but for this letter, let's just focus on the
economic aspects of a particular election.
In what seems like an eternity, but
was only a short time ago, we were learning more about "hanging chads"
on punched election ballots in Florida than any of us ever wanted to know. The
world marveled as the denizens of the last Superpower fought tooth and nail
over whether a ballot counted according to whether the holes were punched
correctly. The difference between President Bush and a potential President Gore
was in the end just a small number of votes in just one state. It was the
closest of elections, with the results literally hanging by a chad. So, it is
not at all far-fetched to imagine what would have happened if Al Gore had won
the election. How much of an economic difference would there have been? I would
suggest, not all that much.
The market had already begun to
collapse by the time Bush was inaugurated in January '01. Could Gore have
prevented a recession? The answer is no, because the weakness had already set
in. There would still have been 9/11. That had been planned since Clinton's
presidency, when Gore was vice-president. An Al Gore as president would hardly
have deterred bin Laden from his plans.
And the economic aftermath of the
event would have been roughly the same. Greenspan and the Fed would have kept
lowering rates and kept them low for too long, no matter who resided in the
White House. Would Gore have nominated an old-school monetarist as Fed Chair?
Hardly likely. Almost the entire establishment, both Right and Left, the latter
of which Gore was a leading figure, were Keynesian to their core. And Greenspan
(or Bernanke, or whoever) was not going to allow deflation on his watch, not without
a fight, with his main weapon being low rates and easy money.
The regulations that fostered the
housing bubble and the subprime crisis were already in place. Both parties were
in thrall to Fannie Mae and Freddie Mac. Greed was already running rampant on
Wall Street. Did I somehow miss loud, insistent calls for a tighter
home-lending regulatory environment from the partisan leadership on either side
of the aisle? No, there weren't any.
Would consumers have borrowed less on
their homes? Was anyone complaining (except those buying?) that housing values
were climbing too fast? Indeed, my neighbors in Texas were lamenting our lack
of participation in the seemingly nationwide skyrocketing of housing prices.
Would we have avoided a subprime
crisis leading to a credit crisis under Al Gore? Did the Democrats protest the
laws, passed by a Republican Congress, that allowed a few investment banks to
massively increase their leverage? Or did they also take the lobby money and
vote for the legislation?
The repeal of Glass-Steagall? That
happened in 1998 under Clinton, with the full support, yea, the insistent
urging, of the Republican leadership. (Shepherded by a certain Texas senator,
who also called Alan Greenspan the "Greatest Central Banker in
History." I still fondly recall Senator Gramm, an economics professor in
his prior life, who I think all in all was a very good senator, if just a tad
overenthusiastic about Greenspan. (Side note: The conference I just spoke at
here in South Africa voted overwhelmingly that the devil's actual surname was
Greenspan, from a rather dubious list of choices. Ah, how we fall from Grace.
But back to our historical meanderings.)
Yes, we would not have had the Bush
tax cuts, which some mathematically challenged individuals think are
responsible for the whole deficit crisis. The tax revenues that were supposedly
lost due to the cuts? Tax revenues were actually up just a few years later. To
argue that the Bush tax cuts did not have a stimulative effect on the economy
flies in the face of all credible nonpartisan research, which shows tax cuts do
indeed provide a positive stimulus effect; so the recovery would have been even
weaker without them.
But under Gore we would likely not
have had the Bush spending increases (which is what he should be
blamed for), as the Republican Congress would likely have continued policies
started under Gingrich, which opposed spending wanted by a Democrat president
and which resulted in the running of a surplus. It was only when Republicans
could get credit for spending increases that they wasted the surplus. But my
bet is that (sadly) they would have still figured a way to use up that surplus,
post-2000.
Would a Gore presidency have reacted
any differently to the credit crisis, in ways that mattered? There was initial
bipartisan consensus (at least of a majority, although with some noted
disagreements) of the need for a stimulus, although later there was serious
disagreement as to what that stimulus should be.
Would Gore have launched a war in
Afghanistan? To think he would not have is to ignore who Al Gore was. He was
(and I assume still is) a very hard-nosed foreign policy and defense hawk, when
he was in the Senate and as vice-president. Would he have gone into Iraq?
Probably not, but when all the world's intelligence agencies (even the French!)
believed Saddam Hussein had weapons of mass destruction and was close to a
nuclear weapon, who can say?
(I should note that they all believed
that because they had tapped Saddam's communication lines. His top scientists
told him they were close, because they were afraid for their lives to tell him
they were not. So even Hussein believed he was close to a nuclear device. It
was all a colossal failure of the intelligence professionals – even those in
Iraq! Without such "evidence," Hussein might still be in power today.
If it was not so profoundly sad, with such a tragic loss of lives, the irony
would be just too delicious.)
So, there would have been less
accumulated debt, but not all that much in the grand scheme of things. The
increase in debt under Bush just brought forward a few years the end of the
Debt Supercycle. Instead of the necessity of dealing with the deficit in 2013,
we might have gotten to 2016. But the math of the entitlement programs makes
the Day Of Reckoning a future certainty. However, that is not the point.
The point is that the main economic
events would have happened under either president. Would there have been a
difference in marginal tax rates? Yes, but I do not think tax rates were the
cause of the debt crisis, or the subprime crisis. Would Republicans have
avoided the temptation to spend under a President Gore? Not if Hastert and
DeLay were still in charge of the House, at least if they continued to espouse
the same policies. Less deregulation? But the subprime problem was not caused
by deregulation.
The economy would have been basically
the same under either president, though a case could be made that there would
have been less accumulated government debt. Differences? Sure, I can think of
many, but not major ones.
Now let's go back to 1996. What if
Dole had won? (Remember Bob Dole?) We would be talking about the Dole
surpluses, as he would have taken the credit for them. Seriously, can you
imagine President Dole giving credit to former President Clinton for the
surpluses that had accrued by 1998? Hardly. We were at the end of the bull
market and a roaring technology boom. Would Long Term Capital and the 1998
Asian crisis have happened under Dole? I certainly think so. The resident of
the White House had no control over those events, and in any event was hardly
likely to try and burst a technology and stock-market bubble. What politician
runs against higher stock prices?
Let's push the clock back to 1992.
What if Perot had kept his charts to himself? George Bush Senior wins rather
handily. What would have changed? The economy was already on the mend when
Clinton took office. The technology boom and the resulting bull market would have
happened under any president. Deficits would have continued to grow.
Perhaps the defining moment of the
decade was not a presidential election but Newt Gingrich becoming Speaker of
the House, with a new cadre of troops that actually wanted to cut spending and
rein in government. At least until Gingrich was gone and they were in Congress
for another decade.
It was precisely the partnership
between Gingrich and Clinton that laid the foundation for the surplus. Would
that have happened with a Bush I? Hard to really say, but Gingrich was a true
believer in smaller government back then, and was regarded as something of an
oddity by much of the Republican establishment. He was just as much a firebrand
back then as he is today, without some of the problems. In an odd way, if we
want to revisit the differences in individuals and their importance to the
economy, our economic future depended back then as much or more on Gingrich
than the president. With a Republican President Bush, would he have had the
same results? Could he have helped engineer surpluses? Would he even have
become Speaker? Hard to say.
Without the reprieve of the surpluses
we had for a few years, we would have been much closer to the end of the Debt
Supercycle than we are today. Who knew we would be nostalgic for the economy
fostered by the cooperation of Clinton and Gingrich?
If Bush I had lost in 1988? I can't
think of anything that would have changed in the next four years. The recession
was due. Dukakis would have raised taxes, just as Bush did.
Reagan and Carter? There you could
argue that Reagan made a difference. But even then, Carter appointed Volcker,
and the die was cast under his watch. Volcker started his war against inflation
under Carter, not under Reagan. Reagan benefitted that it was early in his
presidency that we had the double-dip recession. Did Reagan's tax reforms help
spur growth? Yes, there is little doubt about that. Note that Reagan did not
ask Volcker to stay on. Back then, Volcker was not very popular.
But Reagan also had the good fortune
to start his presidency at the beginning of a bull market and a technology
revolution. Stock market valuations were at historic lows, not because of
Reagan but because of Volcker and the double-dip recession he caused.
Reagan certainly helped the business climate by lowering taxes on small
businesses and reducing the regulatory burden.
I would argue that the main effect of
a Reagan presidency was felt after he left. It was his stamp on the economy,
whether you liked it or not, that set the tone for the next 20 years.
So, is the upcoming election a truly
defining moment? Will this election change our economic future all that much?
Or are things going to more or less unfold the same (in terms of the economy),
whether Obama is re-elected or we have a Republican (whoever that may be)?
To get a sense of the answer, we have
to go back four years, to a rather heated primary battle between Hillary
Clinton and Barack Obama. Republicans were enjoying the spectacle of the two of
them beating each other up, questioning each other's fitness to lead, debating
the merits of their experience and their visions of the future. Let's really
alter history and assume Hilary Clinton had won, as most everyone at the
beginning of 2012 thought would happen. She goes on to beat McCain and then has
to deal with the aftermath of the debt crisis, which would have been in full
bloom as she entered office.
What would have been different? Bill
Clinton always said they were a team, so let's assume for a second that she
would have been similar to him with her policies. There is certainly nothing in
her role as Secretary of State to suggest anything else. Bill Clinton was
center-left, not as hard-left as Obama. He was a pragmatist who could tack to
the center when it was the thing to do. But he also had his hand in every bit
of policy decision. He wanted details on everything. To think Hillary would
have not been deeply involved in whatever stimulus there was, and it would not
have been similar in size, would not be consistent. The stimulus would have
been less of a candy store for Democratic Congressman and more focused.
Republicans would still have been deeply critical. Aren't we always, of a
Democratic President, and vice versa? But I imagine there would have been more
infrastructure and targeted spending. Both Clintons are policy wonks, to their
credit. You might not like their policies, but they do know the detailed ins
and outs of what they do, and why. They were at home in DC and they knew the
players. President Hillary Clinton would have hit the ground running on a
targeted stimulus, and it would have been her stamp and not Nancy Pelosi's on
the bill. But the economic results would have been pretty much the same for the
first three years.
The economy would still have been down
8 million jobs. Tax revenues would have fallen in any event. Would the stimulus
have been less under McCain? Yes, but it would have still been massive. Hillary
would finally have gotten her health-care project, but it would have been
different in its scope and reach, I think. And just like Bill, she would have
found a way to get bipartisan support. While Obama talked about a new post-partisan
era, the last time the parties actually worked together was under a Clinton.
And there would more than likely have
been a Republican takeover of the House in 2010, as mid-term elections often do
change things up (as in 1994).
So, one way or the other, we would
arrive at 2011 and the crisis over raising the debt ceiling.
During that crisis I had the privilege
of being at a three-hour-long private dinner with the Speaker of the House,
John Boehner. There were about 12 of us at the table. My book Endgame was
just out, and I was invited to be the agent provocateur for the evening. I made
a short (for me) presentation of the problems confronting the country,
particularly the deficit crisis – not much different from what I write here,
just maybe a tad more colorful and pointed. There were also a couple of members
of the House Republican leadership present, and I wanted to make a few very
serious points, as these were the people who would be tasked with coming up
with some solutions. I don't get many chances like that.
About halfway through the dinner, and
afer some very sobering and frank conversation, I light-heartedly remarked
that, "It's too bad you had to deal with Harry Reid over the debt
ceiling" (as nothing was getting done at the time).
Boehner turned and looked at me and
said with some passion, "Harry? [rising voice] Harry? Hell, Harry ain't
the problem. If it was just me and Harry we could sit down tomorrow and get it
done."
The problem, at least from Boehner's
point of view, was they could not get an agreement with Obama. (It would be
interesting to get Reid's version. Note: I will be in DC next Thursday. Just
saying.) And later, when they did reach an agreement on a rather modest
beginning to a real deficit-reduction package, I am told that when Boehner
called to say he had the votes lined up on the deal he thought they had agreed
to, at no small expense to his political capital, Obama decided he wanted
another $400 billion in taxes. Which was a non-starter. And thus the gridlock.
My bet, in my alternative world
history, is that Hillary Clinton would have gotten that deal done. And more.
Because the math of not dealing with the deficit is apparent to most of the
politicians I have talked to in DC, whether Republican or Democrat. They have
different ways to solve the problem, but they know it has to get done. The
economic health of the Republic is truly at risk.
But that is not where we are. We do
not have a Hillary Clinton as president. There is a very clear divide in
Washington DC on the path forward. Whether you blame it on Obama or Republican
recalcitrance, the problem is not being dealt with.
This election is ultimately about
dealing (or not dealing) with the deficit, and putting the country on a path to
a sustainable budget deficit, one that is less than the growth rate of the
country. As I have argued elsewhere, and will argue in future letters, that is
the paramount issue. Not dealing with the deficit runs the very real risk of
the bond market treating us just as it is treating Italy and any other country
that gets to the point where its debt is unsustainable. Not this year or the
next for the US, but almost certainly before 2016. And once the bond market
loses faith in a country, it takes a massive restructuring to restore that
confidence. And we can see how that is playing out in Europe.
The next president must have the
ability to get a consensus. Let me shock a few of my fellow Republicans and say
that I think the deficit is such a deadly disease that it would be better for
the country for the Democrats to be in power and forced to deal with the
situation than to do nothing. I would not like their solution, and I think it
would be harmful, but not as harmful as a second Depression, brought on by not
dealing with the deficits and entitlement problems.
As a businessman, I would rather pay
higher taxes on profits than to have no profits at all. Just tell me the rules
and I will figure out how to adjust. A Depression 2 would mean 20% unemployment
(at least) and a real lost decade, with the Boomer generation trying to figure
out how to deal with no money and no jobs and being old.
And the choices we would be forced to
make? The spending cuts would be far deeper than anyone can now imagine, and
the taxes needed far greater. Think what happens when any country has hit that
debt limit. Greece is not having fun. And either Italy is going to be unhappy
with the longer-term recession it will have, or Germany is going to be unhappy
with the ECB backing Italian debt at below-market rates for a long time, which
means printing money and a much lower euro. Actually, I think both must happen
if the euro is to remain a viable currency. That's just what happens when you
don't deal with deficits before they become a problem. If Italy is to remain in
the euro, there must be a back-door bailout by the ECB, accompanied by Italian
austerity (is that an oxymoron?). And don't forget Spain.
What would the Fed do in such an
event? Does it succumb to the worst fears of the Austrian economic crowd and monetize
the debt in an effort to fight deflation and depression? Or does it trash the
dollar and make gold bugs happy? Or does it find its inner Bundesbank
(Austrian) core and eschew the easier way out?
This is a question to which we do not
want the answer. Whether it's yes or no, the answer is a disaster. Just choose
the form of disaster you prefer. To the unemployed, retirees, and the young, it
will make little difference. Ask our grandparents (or my father and mother),
who lived through the Depression.
And doing nothing will mean that we
find the answer to that question. The very answer we want to never know in real
life. It makes for interesting speculation now, but living through it will be
hell.
Both Obama and whoever the Republican
nominee is owe the American people an answer today as to what they will do if
given the chance. To blame Congress for doing nothing is not a solution. A
generic answer of cutting spending will not do. Allowing the Bush tax cuts to
expire gets us less than 20% of the way there. The "rich" do not make
enough money, even if you take 60%. We would still be down a half a trillion or
more, probably much more, as income vanishes as taxes rise. Funny thing about
that: people respond to higher taxes by making less.
What cuts will you actually make if
you are Obama? And do not suggest that it can be done by getting rid of waste.
Everyone promises to do that, and it doesn't happen. Not that we shouldn't try.
There is just not all that much there, and certainly not enough to close the gap.
Blaming a "do-nothing" Congress is also not enough. What do you want
them to do? Not bits and pieces, but what is the whole game plan for dealing
with the deficit?
If you are Republican, what programs
and spending will you cut? What actual reforms of entitlements will you ask
for? And if that's not enough, what taxes will you raise? On whom? Or will you
be willing to stop giving tax deductions for mortgage interest, charities, and
(literally) 3000 other tax "incentives." Actually, if no deductions
were allowed for the so-called tax expenditures (or targeted deductions), the
budget would come into balance. Those tax deductions are over $1 trillion a
year. Of course, everyone thinks their favorite tax deduction is vital to the
future of the Republic, and losing them will make a lot of people upset.
Who will the candidates be willing to
upset? The country does not need vague policies and ideas, we need specifics. A
real budget proposal, with details, just like a family or business in crisis
would create. We don't need someone to tell us what they think we want to hear,
but what they will actually do to deal with the most pressing issue of our
time.
Will you consider radical tax reform?
A VAT instead of an income tax, or reduced income taxes and no Social Security
or Medicare tax, if that is the deal on the table? What is your opinion on
various types of taxes? A flat tax? At what rate?
Then run on that plan, or set of
choices. Make it clear beyond the vague platitudes of politics as usual. This
election is that important. Take it to the voters and get a mandate. It is time
for a national conversation on debt and the deficit. It will be no secret what
I prefer, as I will be writing on that theme in the coming weeks. But it is
more important that we come to a consensus than that it be done in any
particular way. I will admit to believing it would be better if we do it with
less government and the most reasonable tax burden we can settle on. But
creating a path to a sound, controllable budget is the important thing, the
primary objective. It will not be easy to forge a consensus from our very
diverse views, but we must if we want to give our children any hope of a better
world than the one we have now.
Actually, that is what is needed
throughout the "developed" world. We are running out of easy
solutions. In many places there are not solutions, just ugly choices and pain.
In the US, we must look around and realize that time is running out. We do have
time, but we need to use it wisely.
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