PART II

The National Debt

            In 1981, the national debt reached the $1 trillion mark for the first time ever.  It had taken the United States government 192 years and the cumulative budget deficits of all the presidents from George Washington through Jimmy Carter, to accumulate that first $1 trillion. The fact that it had taken so long to accumulate that much debt was somewhat comforting, and the public debt was not considered a serious national problem in 1981.  That was about to change in a big way. 

            Tax-cut fever descended upon the nation with the election of Ronald Reagan to the presidency, and it was not accompanied by any noticeable willingness to also cut government spending.  The government traded what some critics called a longstanding policy of “tax and spend” for a new policy of “borrow and spend.”  As a result, it took only five years for the nation to add the second trillion dollars to the debt and four more years to reach the $3 trillion mark.  The long-held notion that the government should not spend more than it collected in tax revenue was abandoned by those who managed the people’s money in Washington.   

            Table A-2 shows the total debt for selected years between 1981 and 2007.  Each of these years marks the time during which the national debt crossed the threshold to the next trillion dollars.  For example, the debt reached $2 trillion in 1986, $3 trillion in 1990, and $4 trillion two years later in 1992.  

Table A-2

National Debt for Selected Years, 1981-2007

Year	Total Debt in $Trillions	Debt as Percent of GDP
1981	.995	32.6
1986	2.121	48.1
1990	3.206	55.9
1992	4.002	64.1
1996	5.182	67.3
2002	6.198	59.7
2004	7.355	63.9
2006	8.451	64.7
2007*	9.008	65.5

Source: Economic Report of the President, 2007,  *Estimate

            It should have been troubling to many Americans that their government added as much to the national debt in just five years as it had added in the previous 192 years, but very few seemed to be bothered by the trend.  By the time the debt reached the $3 trillion mark four years later in 1990, and the $4 trillion mark two years after that in 1992, a lot of economists and others had begun to issue warnings.  However, these warning fell on deaf ears because our leaders continued to repeat a very comforting phrase.  “The American economy has never been healthier or stronger,” we were assured over and over by our government. If that was true, why not just enjoy the good times that the large tax cuts had ushered in and forget about the national debt? 

            By 2006, the national debt was $8.45 trillion, and government statisticians predicted that it would cross the $9 trillion mark in 2007.  Still most Americans did not realize that the public debt had increased by 900 percent just since 1981.  Nor did they know that the total interest on the national debt was more than $1 billion per day, each and every day, 365 days per year.  How could they know these important facts?  They had been told that the national debt was being paid down even as it skyrocketed.  President Clinton, Vice President Al Gore, and President George W. Bush had all talked about paying the debt down as it soared higher and higher.

            In addition, very few Americans realized that a substantial portion of the national debt was owed to Japan, China, and other foreign countries.  I used to be able to tell my students that the national debt was no big deal and that interest payments on it went right back into the American economy because we owed the debt to ourselves.   That is no longer totally true.  Approximately 44 percent of the publicly held debt in 2006 was held by foreign investors.   About 66 percent of that 44 percent was held by the central banks of foreign countries with most of it being held by the central banks of China and Japan. 

            Because of this change in who holds the United States’ debt, when we pay interest on the debt, a substantial amount of those interest dollars flow out of the American economy and into the economies of these foreign nations.  It is hard to see how that can be good for America or its citizens.  In a sense, we are mortgaging the future of our children and grandchildren by our irresponsible deficit spending today.   Does anybody care?   

PART III

The Looting of Social Security

            In 1983, legislation was enacted to improve the solvency of the Social Security trust fund which had run small budget deficits for seven years in a row from 1976-1982.  The legislation was in response to a recommendation the previous year by a Presidential Commission headed by Alan Greenspan.  It was designed specifically for the purpose of building up a surplus in the Social Security trust fund in preparation for the staggering new obligations the fund would face when the baby-boom generation begins retiring about 2010.  Both Social Security tax rates and the Social Security tax base were gradually raised over a seven-year period so the trust fund would be solvent when it took the big financial hit resulting from the retirement of the baby boomers, the largest generation in American history. 

            Unfortunately, instead of using the increased Social Security revenue to build up the size of the trust fund for future retirees as was intended, the government began using the surplus to pay for other government programs as soon as it first appeared in 1983, and it has continued to do so ever since.  This practice has masked the true size of federal budget deficits because each year since 1983 the government has subtracted the surplus in the Social Security Trust Fund from the deficit in the operating budget and reported an official budget deficit that was billions of dollars below the actual deficit.

             The systematic use of Social Security money to pay for other government programs was not widely known by the public, but a few courageous members of Congress fought hard to end the practice.  Senator Ernest (Fritz) Hollings from South Carolina was one of the most vocal critics of the misuse of the Social Security fund.  In a speech on the floor of the United States Senate on October 13, 1989, Senator Hollings expressed his outrage at the fraudulent practices that the government was already involved in.  Excerpts from that speech are presented below. 

            “…The most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund in order to mask the true size of the deficit…

            The public fully supported enactment of hefty new Social Security taxes in 1983 to ensure the retirement program’s long-term solvency and credibility.  The promise was that today’s huge surpluses would be set safely aside in a trust fund to provide for baby-boomer retirees in the next century. 

            Well, look again.  The Treasury is siphoning off every dollar of the Social Security surplus to meet current operating expenses of the Government…

            …The hard fact is that, in the next century, the Social Security system will find itself paying out vastly more in benefits than it is taking in through payroll taxes.  And the  

American people will wake up to the reality that those IOUs in the trust fund vault are a 21^st century version of Confederate bank-notes.”

            The issue finally came to a head in 1990 when Senator Daniel Patrick Moynihan of New York, another advocate of protecting Social Security, sent shock waves throughout Washington and much of the nation with his proposal to cut Social Security taxes.  Moynihan had been a strong supporter of the 1983 efforts to strengthen the Social Security system.  He had served on the commission that had recommended the plan that involved gradually raising Social Security taxes in order to begin building a reserve with which to finance the retirement of the baby boomers. 

            Moynihan was angry that, instead of being used to build up the size of the Social Security Trust Fund for future retirees as was intended, the surplus Social Security revenue was being used to pay for general government spending.  He proposed undoing the 1983 legislation by cutting Social Security taxes and returning the system to a “pay-as-you-go” basis which would have provided only enough revenue to take care of current retirees.

            Cutting Social Security taxes was not really what Moynihan wanted.  What he was actually doing was blowing the whistle on the government for using the surplus for general government spending and then giving the impression that the deficit in the government’s operating budget was tens of billions of dollars below what it actually was. 

            President George H. W. Bush, who had said over and over on the campaign trail, “Read my lips.  No new taxes,”             opposed Senator Moynihan’s plan to cut Social Security taxes.  He did so because, without the Social Security surplus from which to borrow, it would have been necessary to either raise taxes or report much larger budget deficits to the public.

            In response to reporters’ questions about the Moynihan proposal, Bush replied.  “It is an effort to get me to raise taxes on the American people by the charade of cutting them, or cut benefits, and I am not going to do it to the older people of this country.”

            Of course, Moynihan’s proposal to cut Social Security taxes did not become law, so the government continued to spend Social Security money to fund other government programs.  As planned by the 1983 legislation, the annual Social Security surpluses gradually became larger and larger over the years.  The surplus for 1985 was $9.4 billion.  By 1990, it had risen to $56.6 billion. In 1995, there was a Social Security surplus of $62.4 billion, and five years later, in the year 2000, the surplus had soared to $149.8 billion. 

            The Budget Enforcement Act of 1990 mandated the removal of the income and outgo of the Social Security trust funds from all calculations of the federal budget, and   Section 13301, the “Hollings amendment”, prohibited including Social Security in any budget calculations.  Senator Hollings, who had fought long and hard, to make it illegal for the government to include Social Security in budget calculations, thought he had won the battle, but he was wrong.  President H.W. Bush signed the legislation into law and then just ignored its provisions. His administration continued to misuse Social Security revenue just as they had done before.  But there was a difference.  After 1990, what had previously just been willful deception became a violation of federal law. 

The New Covenant on Social Security

            During the 2000 presidential campaign, Gore made the raiding of the Social Security trust fund a major campaign issue.  He promised that if he were elected President, all surplus Social Security revenue would be put in a lockbox for Social Security and Social Security alone. 

            Not to be outdone, Republican candidate, George W. Bush, also pledged to end the raiding of the Social Security trust fund.  Throughout the fall campaign, Bush promised over and over that he would end the practice of raiding the trust fund, and that Social Security revenue would be spent only on Social Security benefits.

            Despite the past raiding of the Social Security trust fund, those who voted for either Gore or Bush in the 2000 election had every reason to believe they were voting for a candidate who had entered into a new covenant with the American people promising to protect the trust fund from any future raiding. 

            Given the extremely close nature of the 2000 election, I think it is a safe bet to assume that neither candidate could have been elected if the public had known in advance that the promise would not be kept.  I further believe that the American people had a right to demand that whoever was elected would honor their pledge to protect the Social Security surplus. 

            Bush continued to promise that Social Security money would not be spent on other programs, even after his election and inauguration.  In his State of the Union address on February 27, 2001 Bush was emphatic about his determination to keep his Social Security pledge.  He said,

“To make sure the retirement savings of America’s seniors are not diverted in any other program, my budget protects all $2.6 trillion of the Social security surplus for Social Security, and for Social security alone.”

            Four days later, on March 3, 2001, Bush sought to eliminate any remaining doubt that might still exist about his sincere commitment to keep his hands out of the Social Security cookie jar with the following statement. 

                “We’re going to keep the promise of Social Security and keep the government from raiding the Social Security surplus.”

            Since Al Gore did not become President, we will never know whether or not he would have kept his promise to protect the Social Security trust fund and spend Social Security revenue only for Social Security benefits.  However, we do know that George W. Bush did not keep his promise with regard to Social Security.  Like his predecessors, Bush has spent every cent of the Social Security surplus generated during his presidency on other programs.  This money, generated by the 1983 Social Security tax increases and earmarked specifically for the retirement of the Baby Boom generation, has been looted and spent.

            By early 2007, the amount of money looted from the Social Security trust fund by the Bush administration and used for general government spending had surpassed the $1 trillion mark, and Bush continued to loot and spend Social Security money at the rate of $500 million per day.  He has certainly broken the promise he made over and over to the American people that Social Security revenue would be used for Social Security and for Social Security alone.  He totally empties the Social Security cookie jar each and every day.   

The Attempt to Privatize Social Security

            In 1983 conservatives from the Cato Institute and the Heritage Foundation drew up a long-term plan to eventually privatize Social Security.  Discouraged over their failure to get privatization included in the Social Security legislation that had been enacted that year, proponents of privatization drew up a long-term plan to implement privatization through legislation whenever the time was right for public acceptance of such action.          George W. Bush embraced the conservative strategy to privatize Social Security during the 2000 campaign and won a lot of conservative support and money doing so.  But he did not push for Social Security reform during his first term, nor did he make it a very big issue in the 2004 race.  It was only after he was safely elected to a second term that Bush became bold enough to join forces with other conservatives and make a determined effort to help the conservatives try to implement their strategy. 

            The first hint that a serious attempt to reform Social Security was on the way came on February 25, 2004 when Federal Reserve Chairman, Alan Greenspan, set off a political storm by proposing cutting Social Security benefits in testimony before the House Budget Committee.  Social Security had not received much public attention since the “fix” of 1983, and most Americans believed that the program was fiscally sound.  Therefore, Greenspan’s call for trimming benefits for future retirees touched a nerve in many Americans, especially those nearing retirement.

            Greenspan said, “We are over-committed at this stage.  It is important that we tell people who are about to retire what it is they will have.”  He warned that the government should not “promise more than we are able to deliver.”  Greenspan pointed to the forthcoming retirement of the baby-boom generation as the reason for his concern.  Few people knew it at the time, but Greenspan’s statement was the opening salvo in an organized campaign to dismantle Social Security as we now know it. 

            Six months later, on August 27, 2004, Greenspan again spoke of cutting Social Security benefits during remarks at a symposium in Jackson Hole, Wyoming. 

            “As a nation, we owe it to our retirees to promise only the benefits that can be delivered,” Greenspan said.  “If we have promised more than our economy has the ability to deliver to retirees without unduly diminishing real income gains of workers, as I fear we may have, we must recalibrate our public programs so that pending retirees have time to adjust through other channels.”

            Greenspan’s first statement came just a month after the Washington Times, in its January 26 issue, carried a lengthy article by Paul W. Robberson which attacked my newly published book, “The Looting of Social Security, How The Government Is Draining America’s Retirement Account”   In order to reveal the tone, I am reproducing the first three paragraphs of the approximately1200-word article below. 

WASHINGTON, Jan. 26 (UPI)--Screaming “Fire! Fire!”…when smoke is detected in a crowded room may be the prudent thing to do, but what about an author who stridently writes “Fraud! Fraud! about the operation of the Social Security system, when, in fact, the U.S. government is spending the money according to rules enacted by Congress  

                If fraud has occurred, then someone must be brought to justice, but if the claim is manufactured or embellished, then someone has been falsely accused. 

                Allen W. Smith does just that in “The Looting of Social Security” (Carroll and Graf Publishers, New York, 2004, $11.20 paperback, 256 pp).  Smith unleashes his attack with the bold salvo that President George W. Bush is “participating in massive…fraud against the American public. …”

            Although I was pleased that the conservative Washington Times devoted such a lengthy article to my new book (despite the negative nature of the article), I found myself trying to figure out the newspaper’s motive for doing so.  At that point in time, there was almost no recognition by the public that the government was continuing to spend Social Security revenue for non-Social Security purposes.  And, to the best of my knowledge, my book was the first book to reveal the looting of the Social Security trust fund.  Could it be that some conservatives were worried about the revelations in my book and therefore felt a need to discredit me and the book before it got into circulation?

            If they were worried that my book would result in widespread public awareness of the government’s practice of looting Social Security, their worries never materialized.  For whatever reasons, fewer than 6,000 copies of the book reached the hands of readers.  The book was initially widely stocked by bookstores, but several months later I received a call from a would-be reader in the Washington D.C. area asking why the book was not available in bookstores.  She said she had been unable to find a copy of the book in any bookstore in the Washington area.  I began checking and soon discovered that the same was true of bookstores throughout the nation. 

            When the book was classified as no longer available on Amazon.com, I emailed them, seeking an explanation. They responded as follows.  “We have learned that ‘The Looting of Social Security: How the Government Is Draining America’s Retirement Account’ is now out of stock, and our supplier does not know when they will have more in stock.”   

            Most Americans do not have a clue that their government is misusing their Social Security contributions, and almost nobody knows that a book was published in early 2004 documenting the practice.  However, at least some reviewers had positive things to say about the book.  The American Library Association’s Booklist reported,

“Smith, an outspoken advocate of economic education, has written a scathing account of massive fraud on the part of our nation's leaders, who have plundered every cent of the Social Security Trust Fund surplus that was specifically earmarked for the retirement of baby boomers.”

            The Boston Globe had the following to say about the book.    

“With dismal clarity, Smith lays out the step-by-step history of how a national pension plan was transformed into an outright shakedown of working people.”

            Prior to the time when Greenspan began speaking of cutting Social Security benefits, most Americans were not aware that Social Security was facing any serious financial problems, either short-term or long-term.  After all, President George W. Bush was in the fourth year of his first term, and he had barely talked about Social Security.  He was the tax-cut president who had argued repeatedly that our economy was strong, and government finances were so good that we should return some of the money to the public through massive income tax cuts. 

            Alan Greenspan should have known better than most just how solvent Social Security was—or at least was supposed to be.  The 1983 payroll tax increase, enacted upon the recommendation of the National Commission on Social Security, headed by Greenspan, had allegedly “fixed” the baby boomer problem with regard to Social Security.  That law required baby boomers to pay enough taxes to fund the benefits of current retirees, plus enough additional taxes to prepay most of the cost of their own Social Security benefits.  The additional tax revenue was supposed to go into the Social Security Trust Fund to build up a large reserve earmarked specifically for the retirement of the baby boomers.  This reserve was to be used to supplement the payroll tax revenue so that full benefits could be paid throughout the period of the Boomers’ retirement years without placing a disproportionate burden on the younger generation. 

            Despite the fact that Greenspan knew the baby boomers had prepaid the cost of their retirement, he silently watched both Republicans and Democrats misuse the money that was supposed to be going into the Social Security reserve without once alerting the public to the practice.  Because of the looting of the surplus Social Security money, the government will be unable to pay full Social Security benefits after about 2018 without a tax increase to repay the looted funds.  Therefore, Greenspan was proposing cheating the approximately 77 million baby boomers out of part of the benefits they have already prepaid.  At the same time, he was supporting making the unaffordable Bush tax cuts permanent. 

            The revenue from the Social Security payroll tax, earmarked exclusively for the payment of Social Security benefits, is routinely deposited into the general fund and all money that is not needed to pay for current benefits is spent as if it were general revenue.  This is fraudulent, and it is a violation of Section 13301 of the Budget Enforcement Act of 1990, which explicitly prohibits co-mingling Social Security funds with general revenue funds.    

            I was fortunate to have the opportunity to point out just how wrong Greenspan was when I appeared on CNBC on February 26, 2004, the morning after Greenspan’s first assault on Social Security was launched.  I also had the opportunity to discuss my views on CNNfn and during more than 100 live radio interviews, but still the public would not buy the notion that Bush was spending their Social Security surplus.  I kept hoping that some high profile credible person would confirm what I had been saying for four years—that all Social Security surplus was being spent.  The American people needed to hear this message from someone who had the clout to convince. 

            On February 9, 2005, President Bush, himself, became the person to confirm that all Social Security money was being spent by the government.  Speaking at an event that was not even supposed to be about Social Security, Bush shocked many observers, including myself, when he openly admitted that surplus Social Security revenue, generated by the payroll taxes, is spent on other government programs. 

            President Bush’s exact words as quoted in the news release issued by the White House Press Office were,

                Some in our country think that Social Security is a trust fund—in other words, there’s a pile of money being accumulated.  That’s just simply not true.  The money—payroll taxes going into the Social Security are spent.  They’re spent on benefits and they’re spent on government programs.  There is no trust.  We’re on the ultimate pay-as-you-go system—what goes in comes out.  And so, starting in 2018, what’s going in—what’s coming out is greater than what’s going in.  It says we’ve got a problem.  And we’d better start dealing with it now.       

            Bush was fully aware that the government was spending all Social Security surplus each and every day.  However, since his actions were a direct violation of his solemn pledge to the public that he would not touch any of the Social Security surplus, and since his misuse of Social Security funds was a violation of federal law, it was astounding that he would openly admit to his transgressions for the public record. 

            The next day, on February 10, 2005, during a speech in Pennsylvania, Bush made another candid state-ment about government Social Security practices.  He said,

                Now one of the myths about Social Security is there’s a pile of money sitting there accumulating, because you put money in, the government saves it for you, and then when you retire you get it out.  That’s not the way the system works.  Every dime that goes in from payroll taxes is spent.  It’s spent on retirees, and if there’s excess, it’s spent on government programs.  The only thing that Social Security has is a pile of IOUs from one part of government to the next.

                This was a clear admission that all Social Security surplus money had been spent and that President Bush was continuing to spend Social Security money each and every day.    

            On Thursday, April 28, 2005, during a nationally televised news conference, President Bush said,

Our system is called pay as you go.  You pay into the system through your payroll taxes and the government spends it.  It spends the money on current retirees and with the money left over, it funds other programs.  And all that’s left behind is file cabinets full of IOUs. 

            I expected that the president’s frank admissions would be widely carried by the news media and that there would be a great deal of public debate and discussion on the issue.  I also hoped that the question of whether or not the government had spent every dime of Social Security surplus revenue on other government programs would finally be settled once and for all.  But the message did not get enough media exposure to have much of an impact on public opinion, and I suspect that most Americans still believe that the contributions they have made to Social Security over the years are in the trust fund awaiting their retirement. 

            In order to understand why Bush would incriminate himself and his own administration to such a degree, one must understand that Bush was on a very different mission in early 2005 than he had been on in the fall of 2000.  In 2000, Bush was trying to convince voters that the government was flush with money and could easily afford his controversial tax cut proposal.  He was successful in that endeavor.   

            In early 2005, Bush announced that he had earned political capital from his reelection victory and said that he intended to spend it.  His number one priority was partial privatization of Social Security.  In order to convince the public that Social Security reform was needed, Bush had to convince them that the system was broken and needed to be fixed. 

            When Bush’s attempt to privatize Social Security ran into stiff political opposition, he chose to publicly reveal the fact that the Social Security trust fund was empty, even though by doing so he had to admit that, like his father and Bill Clinton, he too had spent the Social Security surplus on other government programs despite his pledge to the American people to protect the Social Security surplus “for Social Security and for Social Security alone.”    

            Bush’s campaign to privatize Social Security remained very active, and generated a lot of news, throughout the summer of 2005.  However, when Hurricane Katrina struck the gulf coast in late August, coverage of the worst natural disaster in a century pushed most other topics out of the news for quite some time.  Since Bush never resumed his Social Security privatization campaign after Katrina, the topic just seemed to fade away.  However, the Social Security trust fund remains empty, and Bush continues to loot and spend Social Security money at the rate of $500 million per day! 

FROM REAGANOMICS TO THE WALL STREET MELTDOWN

by

Allen W. Smith, Ph.D.

            Most Americans were shocked by the Wall Street meltdown of September 2008.  It seemed to many as if the crisis just came out of the blue with no advance warnings that economic trouble might lie ahead.  But that was not the case.  The nation has been heading toward economic crises for a full quarter-century, ever since Ronald Reagan introduced “supply-side economics” in 1981.  And the banking crisis could be just the tip of the iceberg.  The financial status of the American government is so dire that it is causing concerns around the world. 

Most professional economists had never heard the term “supply-side economics” until Ronald Reagan announced his support for it in the 1980 primary campaign. I had a Ph.D. degree in economics and had been teaching the subject to college students for more than a dozen years at the time Reagan introduced the concept to the world.  Yet, I had never seen any reference to the concept in any of the professional literature, and it was not included in any textbook that I had ever used. 

There is good reason for this.  The theory almost came out of nowhere.  Robert Merry and Kenneth Bacon stated in a February 18, 1981 Wall Street Journal article, “Capturing the Executive Branch of government was an amazing victory for the supply-side movement, which hardly existed a mere eight years ago.”  And so it was.  Never before had an economic theory so new, so untested, and with so little support from professional economists as a whole, been accepted and pushed by the federal government. 

According to Merry and Bacon, supply-side economics became a political movement when the ideas of Arthur Laffer of the University of Southern California, and Robert Mundell of Columbia, captured the imagination of Jude Wanniski, an editorial writer for the Wall Street Journal, who reportedly sought receptive Washington politicians and finally found one in Representative Jack Kemp of New York.  In 1977, Representative Kemp, along with Senator William Roth of Delaware, coauthored the Kemp-Roth Bill to slash individual income tax rates by 30 percent over a three-year period.  Mr. Kemp then reportedly set out to convert Mr. Reagan, whom he considered the most receptive of the potential presidents.

The ideas and objectives of the supply-siders were very compatible with Mr. Reagan’s own political philosophy, so it was not difficult to convert him to the new economic theories.  Thus, Reagan’s pledge to support passage of the  Kemp-Roth Bill and call for a 30 percent cut in tax rates over a three-year period became the most popular promise of his campaign and undoubtedly played a major role in his big win. 

Usually, new economic theories require years of debate and testing before they stand a chance of being implemented as a part of government economic policy even when they are the product of some of the greatest minds in the field.  But, because the ideas of the supply-side supporters were so compatible with the political philosophy of Ronald Reagan, the new, untested theory was to become the cornerstone of Reagan’s economic policy.  

            Even before the Reagan administration had implemented any of its economic policies, Americans were warned of the dangers inherent in Reagan’s proposals by economists. And many economists have continued to try to alert the public to the likelihood of impending crises if we continued to follow that pathway.  I happen to be one of those economists who felt a moral obligation to try to warn America about the catastrophic harvest we would some day reap if we continued to follow the economic policies launched by Ronald Reagan in 1981, and practiced by both President George H.W. Bush and his son, George W. Bush.  I have been following closely, and writing about, the federal budget and the looming crises ever since Reagan first announced his flawed  proposals.    

            Paul Samuelson, the first American to receive the coveted Nobel Prize in economics, was one of the first well-known economists to warn of the dire consequences that would result if Reagan’s proposals were put into effect.  Samuelson, who wrote a regular column for Newsweek at the time, had access to a mass audience and he did everything in his power to alert the public to the inherent danger in Reagan’s economic proposals.  Below is an excerpt from an article by Samuelson that appeared in the March 2, 1981 issue of Newsweek.      

Reagan’s program does attempt a radical break with the past.  A radical-right crusade is being sold as a solution for an economy allegedly in crisis.  There is no such crisis!  Our people should join this crusade only if they agree with its philosophical conservative merits.  They should not be flim-flammed by implausible promises that programs to restore the 1920s’ inequalities will cure the inflation problem. 

Dr. Samuelson tried his heart out to alert America to the dangers it was facing.  But it was to no avail.  His warnings fell mostly on deaf ears.    Very few Americans cared about what professional economists thought, even Nobel prize-winning economists.  They believed whatever the charismatic Reagan told them.  He had promised that he could deliver a major tax cut and still balance the budget by 1984.  Why should the people take the word of Samuelson over that of the President who had just been elected by a landslide?  Never mind that Reagan chose a 34-year-old with no training in economics as the chief architect of his economic policy or that he ignored the advice of his own Council of Economic Advisers.  Surely the President knew what he was doing.

            Although his policies inflicted great damage upon the American economy and the fiscal status of the federal government, Reagan continued to insist throughout his presidency that. “The American economy has never been healthier or stronger.”  Instead of acknowledging that Reaganomics had led to catastrophic deficits and a skyrocketing national debt, and taking remedial actions, Reagan continued to stubbornly insist that his economic policies were sound despite the abundant evidence to the contrary.  And the most disturbing part of it all is that the American people continued to believe him. 

            The “great communicator” seemed capable of charming the people into believing the economy was strong and healthy despite enormous evidence to the contrary.  However, when George Bush tried to follow in Reagan’s footsteps, he was unable to convince Americans, who knew otherwise, that the economy was sound.  Although President Bush seemed such a sure bet for re-election in 1992 that most of the top contenders for the Democratic nomination chose not to run, Bill Clinton saw the incumbent president as vulnerable because of the state of the economy and the negative effects of Reaganomics

            Ronald Reagan, George H. W. Bush, and George W. Bush were all guilty of extreme economic malpractice, and their irresponsible policies cost the nation dearly.  Economic malpractice occurs when policy makers pursue economic practices and policies that are not consistent with sound economic principles, as viewed by the majority of professionally-trained economists, and when such unsound practices inflict damage on the economy.  

In the medical field, when doctors take actions that are not consistent with what the majority of doctors consider to be sound medicine, and when such actions result in injury to the patient, the patient is entitled to sue the doctor for damages resulting from the malpractice. Doctors are not entitled to experiment with their patients.  They must stick to medical treatments that have proven effective in the past, and which are generally supported by the majority of medical professionals. Doctors who deliberately deviate from these standards may loose their medical license to practice and may be ordered to pay millions of dollars in damages by the courts. 

If a would-be doctor, who has never been to medical school, were to risk the life of a patient by performing surgery on the patient, that would-be doctor would end up behind bars.  Yet, during the early years of the Reagan administration radical experimental surgery was performed on the American economy, which adversely affected millions of people, by government officials who had little knowledge of economics.  These actions were taken despite the fact that the majority of professionally trained economists did not support them, and they were implemented over the protests of Nobel-prize-winning economists.

When a medical doctor steps outside the bounds of traditional and conventional medicine (by endorsing and supporting doctor-assisted suicide, for example), it becomes a worldwide news story.  This results in widespread public debate and sometimes actions to stop the nontraditional practice of medicine. However, when government policy makers take actions that are detrimental to the long-term health of the economy in order to practice what appears to be good short-term politics, the public is rarely made aware of these actions by the news media. 

It’s not that journalists have no interest in reporting economic malpractice.  The problem is that most journalists would not recognize economic malpractice if it were staring them in the face.  Once again, this is not the fault of journalists.  It is the fault of the American educational system. Most journalists have had little or no formal instruction in economics just as the majority of Americans in most fields have received little or no formal education in the field of economics.

This widespread economic illiteracy poses one of the greatest threats to America’s future, and it is the primary cause of all economic malpractice.  Economic illiteracy threatens our future, both as individuals and as a nation.  Although economics has a greater impact on our daily lives than almost any other academic subject, most high school graduates are never exposed to the subject.  In addition, most college graduates have not taken a single course in economics.  All high school students are required to study American History and American Government presumably so they will be “better citizens” and “better-informed” voters.  This is good, but it is impossible to have a clear understanding of either United States History or American Government without having a clear understanding of basic economic principles and a knowledge of how the American Economy operates. 

Most Americans have almost no understanding of the field of economics.  They know the basics of American history and have at least some understanding of American government. But the field of economics, which affects their lives more than any other subject, is as foreign to them as Latin.  Even worse, some people who know nothing about economics seem to think they know everything. 

Economic illiteracy is one of America’s greatest threats.  It has played a leading role in the practice of economic malpractice in the past, and it is the primary reason that most Americans believed the hoax that the nation had a huge budget surplus as many top politicians were claiming as recently as 2002.  

Most members of Congress and other top government officials would probably fail a general test on economic literacy.  Most have never had a course in economics, but still think they know enough about the subject to pass judgment on which economic proposals are sound and which are not.  This has gotten the nation into great trouble in the past and will continue to do so in the future.

The primary problem is that many people, including members of Congress and other top government officials, know very little about economics but think they know a great deal. They have an extremely simplistic notion of what economics is about and believe that they are capable of making decisions about it without consulting experts.  Many have the mistaken notion that economics is a business subject.  It is not.  It is a highly complex social science.

Economics can be defined as the study of how individuals and society choose to use limited resources in an effort to satisfy people’s unlimited wants. But there is so much more to it than this simplified definition suggests.  There are some elements of common sense in the study of economics but, overall, economics is a highly sophisticated science.  The following short excerpt from the article on economics in Encyclopedia Americana is a good summary of the scientific nature of the field of economics. 

“Like medicine or engineering, economics is a rigorous discipline.  Hard thinking has produced hypotheses, and those hypotheses have been tested by empirical observation and, where possible, by careful measurement.  When the results turned out to be inconsistent with the hypotheses, more hard thinking came up with new hypotheses.  The method of economics, then, is not different from the methods of other sciences.”           

            Economics is one of the six categories in which the coveted Nobel prize is awarded to persons  “who have made outstanding contributions for the benefit of mankind.”  The other five categories are, medicine, physics, chemistry, literature, and peace. 

Congress would never consider enacting legislation on medicine, physics, or chemistry, without considering the views of experts in these fields.  Yet, during the Reagan administration, Budget Director David Stockman, who had never had even an introductory course in the field of economics, became the chief architect of economic policy and totally ignored and defied the warnings of outstanding professional economists some of whom had been awarded the Nobel Prize.

            America paid an enormous price for that economic malpractice.  Yet, in the 2000 presidential election, the American people elected a new president who was expounding proposals, including a major tax cut, that were totally contrary to the thinking of most mainstream professional economists.  Most Americans, including top government officials, do not know much more about economics than they know about chemistry or physics.  However, they are aware that they don’t know much about chemistry or physics, but unaware that they are equally illiterate in the field of economics.   

            Absolutely everything the government does affects the economy in some way, either positively or negatively.  So whether or not the government is trying to have an impact on the economy when it takes certain actions, we can be sure that the actions will have some effect on the economy.  In the field of medicine, doctors know that treating a patient for one medical problem could result in bad side effects and make another problem even worse.  Extensive research has been done in an effort to determine what potential side effects can occur as a result of any given course of treatment, and doctors exercise great caution in an effort to avoid harming the patient in some other way when they treat him or her for any particular condition.

            There are many economic side effects to all major government actions even when the government has no desire to have an impact on the economy.  This is why a careful analysis of any proposed action should be made by competent, professionally trained economists before the action is taken, and the findings of the economists should be taken into consideration by policy makers. 

            It is especially critical to note that any increase or decrease in government spending and any increase or decrease in taxes will have a significant impact on the performance of the economy.  The nature of this impact will depend upon the stage of the business cycle in which the economy is currently operating.  If the economy is in a severe recession with high unemployment, either a specifically targeted increase in government spending or a properly structured temporary decrease in taxes can have a positive effect on the economy. 

The additional purchase of goods and services resulting from a direct increase in government spending, and the increased consumer spending resulting from the additional “take-home” pay following a tax cut, will increase total spending (aggregate demand) and thus help the economy to recover from the recession.  Thus, in times of recession and high unemployment, any actions that result in an increase in aggregate demand will have a positive impact on the performance of the economy.  However, at a time when the economy is at the peak of the business cycle, with very low unemployment and labor shortages, an increase in government spending or a decrease in taxes is just about the worst thing the government could do. 

            Regardless of the state of the economy, it is crucial that short-term efforts to stimulate the economy with tax cuts be temporary and targeted at consumer spending.  Permanent cuts in taxes can wreak havoc with the budget in the long term and result in massive future deficits and soaring growth in the national debt. 

Probably the first time that any administration was guilty of economic malpractice was during the Great Depression.  However, it is hard to hold Hoover responsible because modern economic science was still in its infancy. And, although Roosevelt was slow to take the correct actions, he did gradually implement fairly sound economic policies.

During the late 1920s, the economy was strong and prosperous.  However, during the Great Depression of the 1930s, the nation suffered enormous poverty and suffering.  The unemployment rate reached 25 percent, and millions of Americans were hungry and homeless.  Yet, at a time when men, women, and children picked through garbage in search of food, sheep raisers in the western states slaughtered sheep by the thousands and destroyed their carcasses.  The market price for sheep had fallen below the cost of shipping them to market so that farmers would lose money if they shipped their sheep to market.  And while millions of Americans were without bread, wheat was left in the fields uncut because the price of wheat was too low to cover the harvesting costs.

In addition, many of the nation’s factories, that could have been turning out goods, and providing the jobs, that Americans wanted and needed so desperately, sat partially or totally idle.   The factories did not operate because they couldn’t sell their products, and people couldn’t buy the products because they didn’t have jobs.  The American economic system was simply allowed to break down, and it remained broken down for a decade. 

            The cost of the Great Depression was astronomical.  According to estimates by economic historians, if the economy had fully used all of its resources during the 1930s, the dollar value of the additional production would have been higher than the cost of World War II.  This would have been enough money to have covered the cost of a new house, and several new cars, for every American family during the decade.

            The real tragedy is that the Great Depression never really needed to happen.  The nation had all the productive resources necessary to produce a prosperous lifestyle during the 1930s just as it did in the 1920s.  However, many of the resources were allowed to remain idle while millions were hungry and homeless.  The policy makers of the 1930s can, however, be excused to some degree because modern economics was still young and untested. 

            After winning the election, Roosevelt continued to follow many of the same economic policies as Hoover at first.  However, he gradually began to adopt some of the principles of modern economics that had been introduced by British economist, John Maynard Keynes.  In 1935, Keynes published a monumental book, The General Theory of Employment, Interest, and Money.  In this book, Keynes set forth a new economic theory that became known as Keynesian economics.

            Keynesian economics soon became the predominant body of economic theory in the Western world.  Keynes came to the United States and met with President Roosevelt in an effort to persuade him to use the new economic knowledge to bring the economy out of the depression.  Roosevelt reportedly told an aide after Professor Keynes left that he hadn’t understood what Keynes had said.

            The New York Times requested that Keynes spell out his view on the American outlook in an article for publication.  Given the desperate conditions of the Great Depression, Americans were hungry for any new ideas or signs of hope that might lead the nation back toward prosperity.  In response to the request, Keynes chose to write “An Open Letter to President Roosevelt” which he sent to the Times. 

            The letter, which appeared in the New York Times on December 31, 1936 and was syndicated in other parts of the United States, was long and detailed.  The first and last of the 19 points Keynes addressed in his letter to President Roosevelt are reproduced below to give the reader some feel for the tone of the letter. 

Dear Mr. President,

            1.  You have made yourself the Trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system.  If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.  But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office.  This is sufficient reason why I should venture to lay my reflections before you, though under the disadvantages of distance and partial knowledge …

            2.  With these adaptations or enlargements of your existing policies, I should expect a successful  outcome with great confidence. How much that would mean, not only to the material prosperity of the United States and the whole world, but in comfort to men’s minds through a restoration of their faith in the wisdom and the power of Government!

                                                With great respect,

                                                 Your obedient servant

                                                  J. .M. Keynes

            Roosevelt gradually became a convert to the new economic thinking and began pursuing policies, including public-employment programs, that would stimulate aggregate demand and put the unemployed back to work.  The economy did improve, but Roosevelt and the Congress were not willing to provide a strong enough dose of medicine to truly get the economy back on track.  It was the massive spending on World War II that returned the economy to prosperity. 

It is extremely important to note that it was not the war itself, but the spending on the war that provided sufficient aggregate demand to return the economy to full employment.  If there had never been a war, but the government had spent as much as it did on the war on other projects such as building roads, schools, hospitals, and so forth, the economy could have shown the same healthy economic growth that it did as a result of spending on the war. 

As the war came to an end, there was much fear that the economy would slip right back into the depression without the war expenditures.  In an effort to do everything possible to keep this from happening, Congress passed the Employment Act of 1946.  This act pledged the commitment of the United States government to provide “conditions under which there will be afforded useful employment opportunities, including self-employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power.”

As part of the Act, Congress set up a Council of Economic Advisers to the President and required the President to send an annual economic report to the Congress, describing the state of the economy and suggesting improvements.  Under this legislation, the President is mandated to select a Council of Economic Advisers so that he will always have access to trained professional economists who theoretically would guide the President away from potential economic malpractice.

The problem is that some past presidents have totally ignored the advice of their own economic advisers and deliberately engaged in economic malpractice.  President Lyndon B. Johnson was the first president to flagrantly violate the intent of the Employment Act of 1946 by turning his back on the sound economic advice of his economic advisers and listening instead to his political advisers. 

President Johnson’s economic advisers urged him to raise taxes to offset the substantial increase in military expenditures on the Vietnam War.  They warned that failure to do so could set off a prolonged period of high inflation.  However, Johnson’s political advisers told him that to do so would not be good politics.  They suggested that to tell the American people that they were going to have to pay more taxes because of the war would be the equivalent of political suicide.  At this time, the war was becoming increasingly unpopular with the people, so they would be especially irritated at the prospects of paying higher taxes for the war.   Johnson believed that raising taxes would prevent him from being elected to another term, and so he placed personal political considerations above pursuing sound economic policies.  Later, when political polls indicated that Johnson was not likely to get re-elected under any circumstances, he announced that he had decided not to seek re-election.  It was at this time that Johnson called on Congress to enact a small temporary tax increase to head off inflation.  A temporary 10 percent surtax was finally enacted in 1968 but it was more than two years too late to nip the inflationary pressures in the bud. 

America paid an exhorbitant price for President Johnson’s failure to listen to the advice of his own hand-picked Council of Economic Advisers. In 1965, the economy was in one of the best positions ever.  The unemployment rate was 4.5 percent, the inflation rate was 1.6 percent, and the government ran a budget deficit of only $1.4 billion.  This was the seventh year in a row that the inflation rate had remained below 2 percent, and the unemployment rate was at its lowest level in 8 years.  The federal budget was almost in balance, and the nation exported more goods than it imported.  And then we blew it!

The first major economic policy error was the failure of the government to curb the excess demand for goods and services during the late sixties.  The escalation of the Vietnam War in 1966 led to a substantial unplanned increase in military expenditures.  The large increase in government spending caused total spending to rise above the full-employment capacity of the economy.  With total spending exceeding the capacity of the economy to produce, prices began to rise and the nation embarked on a long journey of demand-pull inflation. 

Although it is easy to blame the Vietnam War for the inflation, it was not the war but the financing of the war that caused the inflationary problems.  When military spending was escalated in 1966, the economy was operating at the lowest level of unemployment—3.8 percent—in thirteen years.   Not since 1953 had the unemployment rate dropped below 4 percent.    Thus, the economy was operating near its maximum capacity output, and any increase in any component of total spending would have to be offset by an equal decrease elsewhere or demand-pull inflation would occur.  If the government demanded an increase in the production of military goods, there would have to be a corresponding decrease in the production of domestic goods.  And any decrease in the production of consumer goods would have to be matched by an equal decrease in consumer spending if rising prices were to be averted.

Thus, President Johnson’s economic advisers argued for a tax increase to finance the increased military spending.  Not only would the tax increase help to avoid deficits in the federal budget at a time of full employment, but it would also reduce the disposable income of consumers and curtail their level of spending.  A tax increase was just what the economy needed in order to avoid major inflation, but President Johnson was very reluctant to call for a tax increase to finance an increasingly unpopular war.

When the President was finally convinced that a tax increase was absolutely necessary, Congress began to drag its feet.  Thus, there was a delay of more than two years in getting the much-needed tax increase.  By the time that it was finally implemented, inflation was too far out of control to be stopped by the small tax increase.  During the three years, 1966, 1967, and 1968, the federal government ran deficits totaling $37.7 billion.  The economy was operating at full capacity, and thus was not capable of any significant increase in the production of goods and services.  Yet the government pumped $37.7 billion more into the economy in the form of spending than it took out in the form of taxes during this three-year period.  This huge increase in purchasing power, which could not be matched by a similar increase in supply of goods and services, could only lead to rising prices. 

After seven years with inflation rates below two percent, the inflation rate rose to 2.9 percent in 1966, 4.2 percent in 1968, and 5.5 percent in 1969.  The inflation was to get much worse during the 1970s and 1980s—11.0 percent in 1974, and 13.5 percent in 1980.  Although much of the inflation of the 1970s resulted from the energy crises and soaring prices for crude oil, these special problems just added to the inflationary pressures started in the 1960s when the government failed to raise taxes in time to prevent the increased spending on the Vietnam War from setting off a prolonged period of demand-pull inflation. 

Year	On-budget Deficit (-)  or Surplus (+)	National Debt at                         End of Period
1981	-74.0	994.8
1982	-120.1	1,137.3
1983	-208.0	1,371.7
1984	-185.7	1,564.7
1985	-221.7	1,817.5
1986	-238.0	2,120.6
1987	-169.3	2,346.1
1988	-194.0	2,601.3
1989	-205.2	2,868.0
1990	-277.8	3,206.6
1991	-321.6	3,598.5
1992	-340.5	4,002.1
1993	-300.5	4,351.4
1994	-258.9	4,643.7
1995	-226.4	4,921.0
1996	-174.1	5,181.9
1997	-103.4	5,369.7
1998	-30.0	5,478.7
1999	+1.9	5,606.1
2000	+86.6	5,629.0
2001	-33.4	5,770.3
2002	-317.5	6,198.4
2003*	-467.6	6,752.0

*Estimates

Source: Economic Report of the President, 2003

Ronald Reagan, the great communicator, had the charisma to get reelected despite the poor performance of the economy and the huge deficits.  He was often referred to as the “Teflon” president, because very little seemed to stick to him personally.  He had a way of deflecting the responsibility for problems to other people.  And, as the economy faltered, and the huge budget deficits caused the national debt to skyrocket, Reagan would repeat over and over, “The economy has never been healthier, it has never been stronger.”     The statements were, off course untrue, because the economy and the federal budget both suffered severely from the Reagan economic policies. 

As Reagan’s vice president, George Herbert Walker Bush inherited enough goodwill from his association with Reagan to get elected to a first term.  However, Bush lacked Reagan’s charisma and was on probation with the American voters from the day he took office.  If he were to have any chance of being reelected to a second term, he would have to turn the economy around. And, given the fact that he had referred to Reagan’s economic proposals as voodoo economics that would lead to disaster, during the 1980 primaries, many observers hoped that Bush would abandon Reaganomics and return to more traditional economic policies.  But Bush continued with the same failed economic policies that had  done so much harm to the economy and the federal budget under Reagan. 

Bush’s failure to chart a new course, with regard to economic policies, cost him any chance of reelection.  Although Bush was riding so high in the public opinion polls after the Gulf war that most of the strongest Democratic potential challengers chose not to even run, Bush’s poor handling of the economy caused him to lose the Presidency to a little-known Governor from Arkansas, Bill Clinton. 

Clinton promised to reduce the federal budget deficits, and once elected he pushed through Congress a deficit reduction package which included both cuts in spending and higher taxes.  Every Republican member of Congress opposed the Clinton plan, and not a single Republican, in either the House or the Senate, voted for it.  It was only with Vice President Gore’s tie-breaking vote that the legislation squeezed through the Senate, allowing President Clinton to sign it into law. 

Republicans cried out, almost in unison, the warning that if the Clinton plan was adopted  both the economy and the federal budget would be seriously damaged.  After 12 years of failed Reaganomics, the Republicans were still opposed to returning to traditional economic policies, and they predicted that the Clinton plan would be disastrous if enacted. 

After eight years in office Clinton turned over the Presidency to George W. Bush on January 20, 2001.  During the last year of the Clinton presidency, the unemployment rate was the lowest it had been in 30 years, 22 million new jobs had been created, the poverty rate was the lowest in 20 years, and there was a non-Social Security surplus of $86.6 billion, compared to the whopping $340.5 billion deficit during the last year of George Herbert Walker Bush’s presidency.  In short, both the budget and the economy were in great shape when Clinton turned over the reins of power to George W. Bush. 

By the third year of the George W. Bush presidency, the unemployment rate had risen to 6 percent, and 2 million jobs had been lost.  Instead of the $86.6 billion surplus during the last Clinton year, the non-Social Security budget ran a whopping $317.5 billion deficit in 2002, and a deficit of $467.6 billion was projected for 2003.  In addition, George W. Bush had already added $732 billion to the national debt, only slightly less than the $995 billion added to the debt by the first 39 presidents combined.  According to Congressional Budget Office official projections, during George W. Bush’s first 4 years, the national debt will go up by $1,164.8 billion (or $1.16 trillion) without counting the cost of the war with Iraq.  All of these projections are based on only the tax cuts enacted at the beginning of the Bush presidency.  The additional $300 billion tax cut enacted in May 2003 just make the projections a great deal more dire. 

            In summary, economic illiteracy is one of the greatest threats to the future of the American economy.  Because of widespread economic illiteracy, it is possible for politicians to engage in major economic malpractice without being held accountable by the voters.  And America has suffered a great deal because of that economic malpractice. 

The Great Depression of the 1930s demonstrates just how big a price the nation can pay for failure to follow sound economic policies.  However, since modern economics was still young and untested in the 1930s, political leaders of that period can be excused to some degree on the basis that they did not really know very much about the economy.

The economic malpractice during the Johnson administration and during the terms of Reagan, Bush I, and Bush II is an entirely different matter. These presidents ignored the advice of their own economic advisers in order to pursue political goals.  America has paid a terrible price, and millions of Americans have suffered needlessly because of the failure of these three presidents to follow sound economic policies.  Yet, in 2001, George W. Bush, knowing the terrible consequences of the economic policies of his father and Ronald Reagan, recklessly launched the nation on a new round of Reaganomics in order to achieve his short-term political goal of enacting large tax cuts mostly for the rich.