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CHAPTER ONE Blueprint for Economic Disaster
The Wall Street meltdown of 2008, and the global economic
collapse that followed, were not acts of God. They were not natural disasters, and they were not inevitable.
They were man-made, and they should never have been allowed to happen. The United States of America had been gradually
heading toward economic crises for a full quarter-century, ever since Ronald Reagan abandoned traditional
economic policies in 1981 and launched the nation in a dangerous new direction.
On February 18, 1981, President Ronald Reagan delivered to a cheering joint session of Congress and
a prime-time television audience a speech that marked a sharp turning point in American history. His “Program
for Economic Recovery” represented a radical departure from the political and economic thinking that had dominated the
American government for the past 40 years.
Among other things, President Reagan called for passage of the controversial Kemp-Roth tax cut proposal
that would cut personal income tax rates by 30 percent over a three-year period. As Newsweek magazine
put it in its March 2, 1981 issue, “Reagan thus gambled the future—his own, his party’s, and in some measure
the nation’s—on a perilous and largely untested new course called supply-side economics.” In
addition to his tax-cutting policies, Ronald Reagan was a strong advocate of reducing the role of government in the economy.
One of his favorite lines was, “Government is not the solution, government is the problem.”
Reagan saw
big government as an evil, and he saw big business as a virtue. He had despised the government regulation
and increased spending that had taken place during the Roosevelt era and during the presidencies of John
F. Kennedy and Lyndon B. Johnson.
Reagan had an enormous impact on the thinking of the American people in terms of the proper role
of government. He stirred up the greatest opposition to taxes since the Boston Tea Party. He
convinced many that high federal taxes were an evil to be avoided at all costs, and he implemented huge tax cuts without any
specific plans to reduce government spending. He even argued that lower tax rates would yield increased
tax revenue because of a magic ingredient in his new supply-side economic theories.
Essentially, Reagan switched the federal government from what he critically called a “tax and
spend” policy to a “borrow and spend” policy, where the government continued its heavy spending but used
borrowed money instead of tax revenue to pay the bills. The results were catastrophic. Although
it had taken this nation more than 200 years to accumulate the first $1 trillion of national debt, during the 12 years of
the Reagan-Bush administrations, that debt quadrupled to $4 trillion!
President Reagan’s proposed 30 percent cut in tax rates over a three-year period was based on the argument that
such a tax cut would result in a substantial increase in the total supply of goods and services produced. The
argument was based on the belief that tax rates were so high that many individuals took more lengthy vacations, accepted less
overtime work, and retired earlier than they would if tax rates were substantially lower. In addition,
the supply-siders argued that the high tax rates discouraged business people from pursuing promising but
risky investment opportunities because even if they were successful the government would take much of the profits in higher
taxes. These beliefs
led supply-siders to argue that a massive tax cut, such as Reagan’s proposal for a 30 percent cut
in tax rates over a three-year period, would lead to more revenue, not less. The American people were told
that they could have their cake and eat it too, and they loved it. According to Reagan, he could cut tax
rates by 30 percent and collect more revenue than before the tax cut. In fact, President Reagan promised
that if Congress would just enact his proposal, the federal budget would be balanced by 1984 and he would simultaneously reduce
both unemployment and inflation.
Congress did enact the President's economic program, including the tax-cut proposal, which had been reduced (at the
request of Budget Director David Stockman) from a 30 percent cut to a 25 percent
cut in personal income tax rates over a three-year period. However, the country soon learned that the promised
simultaneous reduction in inflation and unemployment was not to be. Inflation did come down, as the economy plunged into the worst recession in half a century.
The civilian unemployment rate climbed to 10.7 percent in December 1982, the highest since the Great Depression of the l930s. Millions of Americans lost
their jobs, and the annual civilian unemployment rate remained above 9.5 percent for both 1982 and 1983.
As the economy recovered from the severe recession, President Reagan argued that his economic
policies were working and the economy was headed toward true and lasting prosperity. On the
surface things did look encouraging. The unemployment rate was gradually declining, and inflation was remaining
low. However, a huge, dark cloud hung over the optimism because of the unprecedented size of the federal
budget deficits and the rapid growth in the national debt.
A president, who had promised that his policies would lead to a balanced budget by 1984, instead gave us record budget
deficits and a doubling of the national debt in five years. The federal budget deficits
soared from $73.8 billion in fiscal 1980 to a record $237.9 billion in fiscal 1986.
Nations, like individuals, cannot indefinitely live beyond their means. While much of the
borrowed money came from Americans who invested in government securities, substantial amounts of foreign capital was used
to finance the huge budget deficits. This practice of borrowing from foreigners was the beginning of a
trend that would become a cause for alarm more than two decades later when the bottom fell out of the world financial system.
Why were the basic economic problems allowed to grow to such disastrous proportions? The primary
reason was that, for the first time in modern history, an American president chose to almost totally ignore the advice of
professional economists, both inside and outside of the administration. Unless an economist could be found
whose advice was compatible with Ronald Reagan’s economic and political views, the administration simply ignored the
advice. It would have been bad enough if the President had just ignored the advice of outside economists
and had listened to his own handpicked economists. However, he ignored both groups.
When Murray Weidenbaum, Reagan's first Chairman of the Council of Economic
Advisers, resigned early in the administration, the President had
the opportunity to search the nation for his type of economist as Weidenbaum's replacement. Finally, in 1982, he selected
Martin Feldstein, a Harvard economist, as his new Chairman.
Mr. Feldstein took his appointment seriously, and he expected to influence economic policy within the administration.
He immediately began to warn the President about the gigantic federal budget deficits and insisted that something be
done to reduce them. However, Feldstein soon learned that he had been appointed only to fill the
position, and that his advice was not going to be taken seriously.
When Feldstein warned of the deficit dangers in the annual Economic Report of the President, Treasury Secretary, Donald
Regan, a non-economist who was playing a major role in economic policy making, told Congress, "As far as I'm concerned,
you can throw it (The Economic Report) away." Feldstein had warned that the deficits, if not curtailed
soon, could devastate the nation's economy. Feldstein had argued that taxes should be raised as a way of
reducing the projected $180 billion fiscal 1985 deficit. (As it turned out, the actual on-budget deficit for fiscal 1985 was
$221.5 billion.)
When, out of frustration, Feldstein began giving public speeches on the subject of the dangerous deficits, he was ordered
to submit his speeches to the White House for prior approval before giving them. The final straw fell when,
just a short time before Feldstein was scheduled to appear on an ABC news show on Sunday February 5, 1984, he
was ordered by the White House to cancel the scheduled appearance because his comments might embarrass the
administration.
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.
With the benefit of hindsight, we can now clearly see that it was a blueprint for economic disaster. Even
if the flawed policies had ended for good after the 12 years of Reagan-Bush, the nation would have been negatively affected
for years to come. But, after an eight-year return to traditional economic policies under President Clinton,
George W. Bush reinstated Reaganomics and completed the nation’s journey to economic
disaster.
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. 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 warned the public of the
dangers inherent 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 did everything within his power 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 one of his two top economic policy makers, or that he ignored
the advice of his own Council of Economic Advisers. Surely the President knew what he was doing.
Reagan’s primary economic policy makers in the early years of the administration
were Treasury Secretary, Donald Regan, and Budget Director, David Stockman. Mr. Regan, who was the former head of the Merrill Lynch stock brokerage firm,
had business experience, but he was not an economist. Budget Director, David Stockman, had absolutely no
formal training in economics. Yet despite the warnings of many outside prominent economists, as well as his own hand-picked
Harvard economist, Martin Feldstein, President Reagan allowed these non-economists to
formulate national economic policy. Much was learned about the early days of the Reagan Administration
with the publication of the infamous article, "The Education of David Stockman"
by William Greider in the December 1981 issue of The Atlantic Monthly. When Stockman's appointment as budget director
first seemed likely, he had agreed to meet with William Greider, an assistant managing editor at the Washington
Post, from time to time and relate, off the record, his private account of the great
political struggle ahead. The particulars of these conversations were not to be reported until later, after
the President's program had been approved by Congress. Stockman and Greider met for regular conversations
over breakfast for eight months, and these conversations provided the basis for Greider's article in The Atlantic Monthly.
When the article was published, it became a political bombshell. In
addition to the revelation that Stockman had rigged the computer at OMB in order to get budget projections that could be sold
to the Congress, Stockman asserted that the supply-side theory was not a new economic theory at all but just new language
and argument for the doctrine of the old Republican orthodoxy known as "trickle down" economics.
Basically, this doctrine holds that the government should give tax cuts to the top brackets; the wealthiest individuals
and the largest enterprises, and let the good effects "trickle down" through the economy to reach everyone else. According to Stockman,
when one stripped away the new rhetoric emphasizing across-the-board cuts, the supply-side theory was really new clothes for
the unpopular doctrine of the old Republican orthodoxy. Stockman said, "It's kind of hard to sell
'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.'
Supply-side is 'trickle down' theory."
Stockman said that the Kemp-Roth tax cut bill was a Trojan horse
to bring down the top rate. "The hard part of the supply-side tax cut is dropping the top rate
from 73 to 50 percent—the rest of it is a secondary matter," Stockman said. "The original argument was that
the top bracket was too high, and that's having the most devastating effect on the economy. Then, the general
argument was that, in order to make this palatable as a political matter, you had to bring down all brackets.
But, I mean, Kemp-Roth was always a Trojan horse to bring down the top rate."
A primary goal of the Reagan tax
cuts was to reduce government spending. He thought that, if less revenue was available, there would have
to be sharp reductions in spending. However, instead of cutting spending, Congress simply borrowed the
money to replace the revenue lost from the tax cut.
Reagan said over and over that the economic problems of America were the result of too much government.
He wanted to trim the size of the federal government as much as possible, and he seemed to believe that if taxes were
cut severely, there would be a corresponding cut in federal spending. In Reagan’s first inaugural
address he said,
“…great as our tax burden is, it has not kept pace with public
spending. For decades, we have piled deficit upon deficit, mortgaging our future and our children’s
future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous
social, cultural, political, and economic upheavals.
You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time.
Why, then, should we think that collectively, as a nation, we are not bound by that same limitation? …It is my intention to curb the size and
influence of the Federal establishment and to demand recognition of the distinction between the powers granted to the Federal
Government and those reserved to the States or to the people…It is no coincidence that our present troubles parallel
and are proportionate to the intervention and intrusion in our lives that result from unnecessary and excessive growth of
government.”
We can now see just how contradictory
Reagan’s words and actions were. When he said, “For decades, we have piled deficit
upon deficit, mortgaging our future and our children’s future for the temporary convenience of the present," a
reasonable person would likely conclude that Reagan was being critical of large government deficits. One
would then further conclude that Reagan intended to follow policies that would result in smaller deficits than in the past.
Instead, Reagan gave us budget deficits of a magnitude not even imaginable in the past. Prior to Reagan’s presidency, we
had never had a budget deficit as high as $100 billion, and only two years with deficits in the $70 billion range.
In 1976, during the Ford administration, the deficit was $70.5 billion. In 1980, during the Carter
administration, the deficit was $72.2 billion. Both of these deficits were primarily the result of economic
recessions that reduced the government’s tax revenue. The average annual deficit for the entire decade
of the 1970s was only $35.38 billion. These are the deficits that Reagan was so critical of—the ones
he said had mortgaged our future and our children’s future.”
The average deficit of $168.87 billion for the entire decade of the 1980s dwarfed that for the decade of the 1970s.
The annual deficits soared under both President Reagan and President George Herbert
Walker Bush. The 1982 deficit of $120.1 billion represented the first time in history that
the deficit had topped the $100 billion mark. The very next year, in 1983, the deficit exceeded the $200
billion mark, weighing in at $207.7 billion.
The longer the Reagan economic policies were in place, the larger the budget deficits
became. In 1992, the last year of the George H.W. Bush administration, the
budget deficit was an astronomical $340.4 billion! The national debt, which was less than
$1 trillion when Reagan assumed the presidency, was more than $4 trillion by the time Bush turned over the reigns of power
to Bill Clinton.
If we look at Mr. Reagan’s full 8-year presidency, the average annual unemployment rate is 7.5 percent.
Since the Great Depression, only in 1975 and 1976, during the Ford presidency, has the unemployment rate been as high,
in even a single year, as Reagan’s 8-year average unemployment rate.
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 econmy and the federal budget under
Reagan. Bush’s
failure to chart a new course, with regard to economic policies, cost him 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. Between
1981 and 1986, the United States was transformed from the world's largest lender to the world's largest borrower.
Although most Americans were never made aware of this historic role reversal for the United States, we can be sure
that our adversaries around the world took note of it. At the very same time that President Ronald Reagan was
building up our military strength to enhance our security and status in the world, our economic strength was waning as we
saw our role as the world’s largest lender being replaced with the dubious distinction of being the world’s largest
borrower.
One might have expected our leaders to be so concerned about America’s new status as the world’s largest
borrower, that they would have put a high priority on taking actions that would help undo the role reversal. But
they were not. They seemed to be comfortable with their “borrow and spend” approach to handling the government’s
finances. The 1984 presidential
election campaign showed just how naïve, and economically illiterate the American electorate is. It
also demonstrated how a charismatic leader, like Ronald Reagan, can convince the masses to ignore facts, and the advice of
experts, and persuade them to follow him wherever he leads, even if it is over the edge of a cliff.
During the 1980 campaign, Reagan had promised that his large tax cuts would lead to a balanced budget
by 1984. Instead, the 1984 budget had a deficit of $185.3 billion. Furthermore, the national debt, which
had taken 200 years to reach the $1 trillion mark, had increased to $1.56 trillion by 1984, and it was racing toward the $2
trillion mark.
The budget was so out of control that almost every mainstream economist in the country would probably have argued that
the 1981 tax cuts were too big and had to be adjusted. Economic advisers to former Vice President Walter
Mondale, who was the Democratic presidential nominee in 1984, convinced Mondale that a tax increase was absolutely necessary
to bring the runaway deficits under control.
Mondale apparently thought he could be honest with the American people about the deficit problem and the need for a
special deficit reduction tax. So Mondale told the voters that a tax increase was inevitable, no matter
whether he or Reagan was elected. Mondale said,
“Mr. Reagan will raise your taxes and so will I.
He won’t tell you, I just did.”
Although he pledged that every dollar of the revenue from the proposed new tax would be used to reduce the deficit,
and not a single dollar of it would be used for new spending, Mondale’s honesty turned out to be a disastrous strategy.
Reagan ridiculed Mondale’s tax proposal and promised that he would bring prosperity and balanced
budgets without raising taxes.
One might think that, since Reagan had not kept his 1980 promises, and since the runaway deficits
were alarming economists and many others, the voters might have been hesitant to vote for Reagan again. But they were not.
On election day, Reagan won 49 states, and Mondale won his home state of Minnesota by only 3,800 votes!
It was one of the most lopsided landslide victories in history. Historians may eventually decide
that it was also one of the greatest mistakes the American people, as a whole, had ever made. America was on the wrong
track in 1984. After 200 years of following reasonably responsible fiscal policies, that had made America the economic envy
of the world, the nation had gone on a four-year fling with deficit financing. Instead of living within
our means as a nation, we were following a policy of borrowing from future generations in order to spend more than we could
afford. It should have been clear to almost everyone that the United States government could not go on, indefinitely, spending
more than its income. But apparently it was not. The 1984 election offered
the opportunity for an informed electorate to change the course of history for the better through the democratic process.
If the public had been educated in economics, they would have realized that Reagan’s flirtation with supply-side
economic theory had been disastrous. The supply-side theory had been tested, and it had flunked the test
miserably. But America did not have an informed electorate. The public was economically
illiterate.
In addition to
all the other malpractice during the Reagan-Bush years, it was during this period that the fraudulent use
of Social Security surplus revenue for general government funding began. The
1983 Social Security payroll tax increase, which will be described in detail in Chapter Three, began generating
surplus Social Security revenue during Reagan’s second term.
The planned surpluses, that were supposed to be saved and invested in order to fund the retirement of the baby boomers,
started out small but escalated rapidly. Although only about $84.5 billion of Social Security surplus came
in during the Reagan presidency, during the four years of George H.W. Bush’s presidency, there was
an additional $211.7 billion in Social Security surplus revenue. Every penny of the surplus from both the
Reagan and Bush administrations was spent on non-Social Security programs.
The surplus money should have been saved and invested. Instead, the surplus Social Security revenue
was spent just as if it were general revenue. Bush who had said, during the campaign, “Read my lips.
No new taxes,” did not need to raise taxes when he could spend money from the Social Security surplus at
will.
A few courageous United States Senators tried to nip the Social Security fraud in the bud early on
by speaking out against it. The three most vocal senators on the issue were Senator Daniel Patrick Moynihan (D-NY),
Senator Ernest (Fritz) Hollings (D-SC), and Senator Harry Reid (D-NV).
On October 13, 1989, Senator Hollings lambasted the Bush administration for its use of Social Security surplus dollars
for funding other programs. Excerpts from that speech are reproduced below from the Congressional Record {Page:
S13411}. “…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 the 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 IOU’s in the trust fund vault are a 21st century version of Confederate banknotes.” Nearly
a year later, the looting of the trust fund was continuing unchanged. On October 9, 1990, Senator Harry
Reid expressed his outrage at the practice during a senate speech. Excerpts from the
speech are reproduced below from the Congressional Record {Page: S14759}.
“The
discussion is are we as a country violating a trust by spending Social Security trust
fund moneys for some purpose other than for which they were intended.
The obvious answer is yes… The trust funds resources are there for the well-being of those who have paid into the Social
Security System.
We should use those resources to see that Social Security recipients are treated well but also treated fairly and treated
equitably. It is time for Congress, I think,
to take its hands—and I add the President in on that—off the Social Security surpluses. Stop hiding the horrible truth of the fiscal irresponsibility that we have
talked about here the past 2 weeks. It is time to return those dollars to the hands of those who earned
them—the Social Security beneficiaries and future beneficiaries…
…I think that is a very good illustration of what I was talking about, embezzlement, thievery. Because
that, Mr. President, is what we are talking about here…On that chart in emblazoned red letters is what has been taking
place here, embezzlement. During the period of growth we have had during the past 10 years, the growth
has been from two sources: One, a large credit card with no limits on it, and, two, we have been stealing money from the Social
Security recipients of this
country. Out of this heated debate on the issue of government misappropriation of Social Security money, came Senator Daniel Patrick Moynihan’s proposal to cut Social Security taxes in order to deny the government access
to the tempting surplus Social Security money. Senator Moynihan, who had been a strong supporter of the
1983 efforts to strengthen the Social Security system, was outraged that, instead of being used to build up the size of the
Social Security Trust Fund for future retirees as was intended, the Social Security surplus was being used to pay for general government spending.
Because Moynihan
believed the American people were being deceived and betrayed, 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.
Moynihan’s position was that if the government could not keep its hands out of the Social Security cookie jar,
the jar should be emptied so there would be no Social Security surplus. President George H.W. Bush was furious over Moynihan’s proposal. In response
to reporters’ questions, 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.”
But President Bush was in fact
taking money from a fund that was supposed to be used to provide for “the older people of this country” and using
it to fund general government. Since none of the $211.7 billion borrowed from Social Security by the Bush administration was repaid during the
Bush presidency, higher taxes will have to be levied against the American people at some point in the future if this debt
is ever to be repaid.
Despite the strong efforts, way back in 1990, to put an end to the raiding of the Social Security trust
fund, President George H.W. Bush continued to loot and spend every dollar of the Social Security surplus.
Even though Social Security funds are required by federal law
to be kept separate from other funds, Presidents Reagan and George H.W. Bush treated them
just like general revenue, and spent every dollar on other government programs. We would like to think
that our two-party system would have eliminated the practice whenever the next Democratic president entered the White House.
But it didn’t. President Clinton seemed to think that if his two predecessors
had gotten by with violating the law and treating the Social Security surpluses as general revenue, then he could probably
get by with it too. And he did. During the
2000 presidential election campaign, both Al Gore and George W. Bush publicly acknowledged
the past looting of Social Security money, and they both pledged to end the practice. But
George W. Bush blatantly ignored both his pledge and federal law and continued the looting just like his three predecessors.
Almost two decades have passed since Senators Moynihan, Hollings, Reid, and others tried so gallantly to protect the
Social Security contributions of American workers, and the practice continues. Back then, the amount of
money that was supposed to be in the trust fund was not all that substantial. Today, we are talking about
$2.4 trillion in accumulated surpluses that is supposed to be safely locked up in the trust fund. Sadly,
there is not a single dollar of real money or any other kind of real asset in the trust fund. It contains
only government IOUs that serve as accounting records of how much money the government has taken from Social
Security and spent for other purposes. The
American people hear over and over from government officials that the Social Security money has been invested
in government bonds. That is a BIG LIE. The money is not invested in
anything, because it has already been spent. Money can be saved and invested, or it can
be spent. However, money cannot be both spent and invested. Once the money is spent,
there is nothing left to invest. The way the government has been able to deceive the public
on this issue is through accounting gimmickry. The government created a special type of certificate available
only to the trust funds. The certificates are called “special issue Treasuries” or “special
issue Treasury bonds.” But they are not real bonds in the sense that most people use the term.
They are simply accounting devices for keeping track of how much money the government owes to Social Security.
They are nothing more than IOUs. In a Washington speech
on January 21, 2005, David Walker, Comptroller General of the GAO, sought to make it clear once and for all that the Social
Security trust fund contains no real assets. He said, “There are no stocks or bonds or real estate
in the trust fund. It has nothing of real value to draw down.”
If the trust fund held regular public issue Treasury bonds like everyone else invests in, there would be no problem.
The bonds could be sold in the open market at any time for full market value. The trust fund is
allowed to hold such bonds and has held some public issue Treasury bonds in the past. However, it does
not now hold any such bonds.
The special issue certificates are not marketable and thus cannot be bought or sold for even a penny on the dollar.
They are totally worthless accounting devices. During President George W. Bush’s campaign
to partially privatize Social Security, he became desperate to find new ammunition with which to convince the public that
Social Security faces real problems. Finally, he decided to tell the truth about the trust fund.
During a speech
in Pennsylvania on February 10, 2005, President Bush made a very candid statement about government Social Security practices.
He said, “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.” During
a speech in West Virginia on April 5, 2005, President bush said,
“There is no trust fund, just IOUs that
I saw firsthand that future generations will pay—will pay for either in higher taxes, or reduced benefits, or cuts to
other critical government programs.”
Despite these definitive statements by the President and the Comptroller General, we are still being told that all
Social Security surplus money is safe and sound because it is invested in “government
bonds.” In later chapters, I will explain, in detail, why this is not true.
CHAPTER TWO The Budget-Surplus Myth
Much of the 2000 presidential election campaign revolved around the claim
that the United States government had huge budget surpluses that would continue for years to come. This
claim was the basis for George W. Bush’s promise to cut tax taxes by $1.3 trillion over the next ten years.
It was the reason that Al Gore was able to promise that he would cut taxes, increase spending on
education, and pay down a substantial portion of the national debt. This claim was reported to the public
as the gospel truth, and almost everyone believed it. There was only one problem. It was all a BIG
LIE. In terms of indebtedness, the federal government’s financial condition was worse in
2000 than it had ever been before.
There is no mystery as to where the public got the idea that the government had somehow stumbled onto a gigantic windfall
of excess money. They had been told this over and over by President Clinton and by both
presidential candidates. Bill Clinton, Al Gore, and George W. Bush all participated in
what was one of the greatest deceptions ever perpetrated on the American people.
Why would President Clinton, Al Gore, George W. Bush, and a host of other politicians from both parties, deliberately
mislead the American people on such a crucial matter? The only plausible explanation is that they were
trying to convince the people that a surplus existed because the surplus myth fit well into the political agendas of all three.
President Clinton and
Vice President Gore wanted a budget surplus to exist so that they could claim that the Clinton Administration, which inherited
massive budget deficits, eliminated the deficits and transformed them into large surpluses in just eight years.
George W. Bush wanted a surplus to exist so that he could promise major tax cuts and attempt to get
to the White House riding the same horse that carried Ronald Reagan to the Oval Office.
The existence of a real budget surplus was in the best interest of both political parties, and the voters loved the
idea that the government had become so rich that it could give money back to the people. It was like believing
in Santa Claus. All parties had such a strong desire for a real surplus to exist that they pretended that
such a surplus actually did exist. But there was no “real” budget surplus in any meaningful
sense of the term!
Funds flowing into and out of the Social Security trust fund are by law supposed to be kept separate
from other government expenditures. So the government would have a real surplus only if its total spending
for everything, except Social Security benefits, was less than its total revenue from all sources, except Social Security
payroll taxes. There had been only two years in the past 40 years in which that condition was met.
The other 38 years were all deficit years.
There was a tiny $1.9 billion surplus in 1999 and a more substantial $86.4 billion surplus in 2000, at a time when
the economy was operating at the peak of the business cycle, and the unemployment rate was at a 30-year low. That’s
it! These were the only two annual surpluses in the government’s operating budget during the previous
40 years. Furthermore, Clinton had run more than $1 trillion in deficits during the preceding
six years, and ran an average annual deficit of more the $125 billion per year during his entire eight years as president.
The surpluses that everyone was talking about in 2000 were “projected” surpluses. They
were figments of President Clinton’s imagination. The planned Social Security Trust
Fund surplus, that was off budget and earmarked for funding the baby boomers’ retirement, first became large enough
to more than offset the continuing on-budget deficit in 1998, a year in which there was a $30 billion deficit in the operating
budget. Instead of reporting the actual deficit of $30 billion, Clinton announced a $69.2 billion federal
budget surplus for 1998. Clinton simply took the $99.2 billion Social Security surplus for
that year, and subtracted the on-budget deficit of $30 billion to arrive at the mythical figure of a $69.2 billion surplus
for 1998. Despite the fact that the $1.9 billion
surplus for 1999 was the first on-budget federal surplus in 38 years, Clinton was not content to just report
the real surplus to the public. Instead, he added the $123.7 billion Social Security surplus for
1999 to the $1.9 billion real surplus and reported the combined total to the American public as the actual surplus.
Finally, in fiscal 2000, Clinton added the $149.8 billion Social Security surplus to the $86.4 billion real surplus
and reported a whopping surplus of more than $230 billion.
Clinton’s true record of deficit reduction would have been phenomenal if he had just been honest with the public,
and the Budget Enforcement Act of 1990 prohibited Clinton from legally combining the Social Security and
non-Social Security budgets for purposes of reporting deficits or surpluses. But Clinton chose to violate
federal law and deceive the American people with regard to the true status of the budget. When
Clinton assumed the presidency in 1993, after twelve years of reckless Reaganomics,
the nation was near the brink of economic calamity. However, by 2000, eight years of sound economic policies
had brought the nation to a crucial new fork in the road. One option was to continue down the Clinton road and begin to pay
down the national debt that had risen so much in the previous 20 years. The alternative was to take the fork in the road that led to a new round
of Reaganomics with huge budget deficits and a skyrocketing national debt.
It was clear that George W. Bush would give us a new round of Reaganomics. However,
it wasn’t totally clear that Al Gore would give us a continuation of the Clinton policies.
Like Bush’s proposals, Gore’s promised tax cuts and new spending were based on the assumption that the
fantasy projected budget surpluses were real. Unfortunately, they were not real.
The circumstances that made it possible for Clinton, Gore, and Bush to pull the wool over the eyes of
the public in 2000 dated back to the Social Security Amendments of 1983.
These amendments were
enacted to improve the solvency of the Social Security Trust Fund that had run small budget deficits for seven years in a
row from 1976 through 1982. The legislation was designed so the increased payroll
taxes would generate annual Social Security surpluses each and every year until 2017. However, the
surpluses would come to an end that year, and the Social Security fund would experience deficits from that point on.
The plan was to build up a large enough reserve in the trust fund by 2017 to fund the payment of full Social Security
benefits during the years 2018 to 2042, at which time the youngest of the baby boomers would be 77 years old. The surplus Social Security money
was to be saved and invested, and it was specifically earmarked for the payment of retirement benefits for the baby boomers.
The new legislation generated
a Social Security surplus of $9.4 billion in 1985 with increasingly larger
yearly surpluses thereafter. The Social Security surplus was $38.8 billion in 1988, $56.6 billion in 1990, and $99.2 billion
in 1998. It was the 1998 Social Security surplus of $99.2 billion that paved the way for the budget surplus
myth. The government ran a deficit of $30.0 billion in its operating budget
in 1998. However, since the Social Security surplus was
larger than the operating-budget deficit for the first time ever, President Clinton took a giant leap into fantasyland and announced that the government had a surplus
of $69.2 billion, the first surplus since the Vietnam War. As mentioned above, Clinton also added the Social Security surpluses
to the real budget surpluses of the next two years, greatly inflating their true size. The American people
were primed to accept even more good news about government surplus money, and Clinton was ready to accommodate them. It would have been bad enough if this had been the extent of Clinton’s accounting mischief. But
this was only the beginning. Clinton claimed that the budget surpluses would continue, indefinitely, into
the future. On June 26, 2000, President Clinton announced that, over the next decade, the federal budget
surplus would total nearly $1.9 trillion. This outrageous, deliberate lie to the American people was, in
my opinion, the greatest sin of the Clinton presidency. It dwarfed the alleged misconduct that ultimately
led to his impeachment. From that point on, the American people seemed to believe that there truly was excess money in the federal budget,
and cunning politicians began building schemes to further mislead the people into believing that surplus money was available
for new programs and/or for cutting taxes. Clinton had given birth to a monster, in the
form of the budget-surplus myth, which would later enable George W. Bush to get by with reckless actions
that would threaten America’s economic and budgetary future and contribute immensely to the current economic crises...
CHAPTER THREE The Social Security Trust
Fund
On February 25, 2004, in testimony before the House Budget Committee, Federal
Reserve Chairman, Alan Greenspan, launched a verbal bombshell which set off a political storm throughout the nation by proposing
cutting future Social Security benefits. Social Security had not received much public
attention since it had allegedly been fixed by the Social Security Amendments of 1983, and most Americans believed that the
program was fiscally sound. Thus, 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.” Pointing to the forthcoming retirement of the baby-boom generation
as the reason for his concern, Greenspan said, “This dramatic demographic change is certain to place enormous demands
on our nation’s resources—demands we will almost surely be unable to meet unless action is taken.
For a variety of reasons, that action is better taken as soon as possible.” 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.” Like his February
statement, this new statement on Social Security by the Fed Chairman generated a lot of
news coverage, and the idea that Social Security might be in some kind of long-term financial trouble began to take root in
the minds of at least some Americans. Greenspan’s comments, along with the propaganda
that had long been spread by conservative think tanks, served as seeds of doubt as to whether or not Social Security was really
as solvent as most people thought. These early statements laid the foundation for President George W. Bush’s
then secret plan to launch an assault against the Social Security program once he was safely re-elected to a second term.
Federal Reserve Chairman, Alan Greenspan, knew better than anyone just how solvent Social Security actually
was, or at least should 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 the 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 be saved and put into the Social Security Trust Fund to build up a large
reserve earmarked specifically for the retirement of the baby boomers. This reserve would 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.
The 1983 legislation marked a sharp break with the traditional pay-as-you-go approach to funding
Social Security benefits. After 1983, the Social Security system no longer operated on
a strictly pay-as-you-go basis. For the baby-boom generation, Social Security has operated on a combination
“pay-as-you-go” and “prepay-your-own-benefits” principle. By the time the baby
boomers retire, they will have prepaid a major portion of the entire cost of their benefits, as well as
having funded the retirement benefits of retirees during the years between 1983 and their own retirement. What Greenspan
and Bush were attempting to do was to distract public attention away from the real Social Security culprit—the
fact that the government had “borrowed” every cent of the surplus Social Security money generated by the 1983
payroll tax increase and used it to finance tax cuts and other government spending programs. If the government
had saved and invested the surplus revenue, we would not be facing any short-term Social-Security funding problem today.
There would be enough money to pay full benefits until the year 2041. Payroll tax revenue,
which has been greatly exceeding benefit payments ever since the 1983 Social Security tax increase, will
cross the line in 2017 and, thereafter, it will be inadequate to fund full benefit payments. This was foreseen
and provided for in the plan recommended by the Greenspan Commission report of 1982. The government increased
payroll taxes in 1983 by enough to generate surpluses for all years up to 2017. If the Social Security
surplus revenue had been saved and invested, as was the intent of the 1983 law, the trust fund would hold
approximately $3.7 trillion in real assets by 2017 when the surpluses will come to an end. Unfortunately,
over the years, both Republicans and Democrats have spent the money, that was supposed to be going into the Social Security reserve,
on other things. Because of the looting of the surplus money, the government will be unable to pay full
Social Security benefits after 2017 without a tax increase.
Most Americans seem to believe that their Social Security contributions go into a special trust fund where it accumulates,
and then, when they retire, the money will be paid back to them out of the trust fund. The notion that
the government has spent all those Social Security contributions that weren’t needed to pay current benefits, to fund
Bush’s income tax cuts and for other government programs, is unthinkable to most Americans. They cannot believe our
government would take revenue that was collected specifically for Social Security and spend it on other programs...
CHAPTER FOUR The Clinton Years
The likelihood
that a little-known governor from Arkansas would be elected President in 1992 seemed almost nonexistent as little as a year
before the election. President George H. W. Bush was riding so high in the polls that most of the leading
potential Democratic challengers chose not to even enter the race. Bush had been the Commander-In-Chief
in the Gulf War, the most decisive American Military Victory since World War II, and most observers believed that Bush would
be unbeatable in 1992. After a stormy primary
campaign, among a field of what most political experts considered “lightweight” candidates, Bill Clinton, the then governor of Arkansas, was nominated as the 1992 Democratic candidate. However,
most observers still thought the nomination was not worth having and expected Clinton to serve as the sacrificial lamb for
the Democrat party. Some of the losing candidates, and those would-be candidates who had chosen not to
run, tended to just write off the 1992 election as a lost cause and set their sights on 1996.
Bill Clinton, however, never saw himself as a sacrificial lamb, and he was determined
to become the next President of the United States. The boy from Hope, Arkansas, who had once considered
becoming a professional saxophone player, had set his sights on the White House while still in high school. As
a delegate to Boys Nation, Clinton met President John F. Kennedy in
the White House Rose Garden, and the encounter changed his life forever. He decided to enter a life of politics and public
service, and he expected to someday return to the White House as President. Despite
his popularity as a wartime president, Bush soon discovered just how important the economy was to American voters.
Ross Perot, a self-made billionaire, entered the race as a third-party candidate and ran a one-issue campaign on deficit
reduction. Clinton hit hard on the deficit, but
also emphasized the need for a major change in Washington. He convinced enough voters, who were looking
for change, to vote for him that he received 43.3 percent of the popular vote, compared to 37.7 percent for Bush, and 19 percent
for Perot. In terms of the electoral votes, the race wasn’t even close. Clinton
got 370 votes compared to Bush’s 168. Clinton had promised to reduce the deficit, and he was determined to do so, no matter how
unpopular his prescription was with the established Washington politicians. He proposed a deficit reduction
plan that included both major spending cuts and higher taxes. There was immediate stiff opposition to the
plan because it included higher taxes. The Republican party had benefited immensely from the credit it got from the Reagan tax cuts, despite the fact that the Reagan cuts were the primary cause of the ongoing
massive budget deficits. The Congressional Republicans were determined to block any effort to raise taxes. The Republican doomsayers argued that
passage of the Clinton economic plan would wreck the economy.
House Minority Leader Robert H. Michel (R-IL), portrayed Clinton
as a traditional tax-and-spend Democrat who was trying to obscure that truth with “the biggest propaganda campaign in
recent political history.” One House Republican said the Clinton budget was a “recipe for economic
and fiscal disaster,” and another one said the package “would put the economy in the gutter.” Congressman Dana Rohrabacher (R-CA) rose on the House Floor and said, “Mr. Speaker, I rise in strong opposition
to the Clinton tax increase, the largest tax increase in American history,
which will hit the middle class, bring our economy to a standstill and in the end increase the deficit.”
Republican Congressman Christopher Cox, also from California, was even more graphic
in denouncing the Clinton plan. He said, “This is really the
Dr. Kevorkian plan for our economy. It will kill jobs, kill businesses, and yes, kill even the higher tax
revenues that these suicidal tax increasers hope to gain.”
Senate Republicans were equally harsh in their denouncement of the Clinton economic
plan. Senator Robert Dole said, “As the President
and congressional Democrats busily work on the biggest tax increase in the history of the world, the American people are watching,
and they do not like what they see. To put it simply, the Clinton tax increase promises to turn the American dream into a
nightmare for millions of hardworking Americans.” One of the most emotionally charged debates on the Clinton economic plan took place on the floor of the Senate on April 3, 1993 between Senator Christopher
Bond (R-MO) and Senator Robert Byrd (D-WV).
The differences in the two senators’ assessment of the effects of the economic and fiscal policies during the
previous 12 years of Republican rule, and their projections as to how the Clinton economic plan would affect the economy and
the budget in the years ahead were like night and day. Excerpts from the Senators’ remarks are reproduced
from the Congressional Record below.
“Mr.
Bond. Mr. President, this debate is about keeping faith with the American
people. This debate is about ensuring that the Federal Government does not destroy our economy.
We have heard today that the stock market took a heavy hit yesterday and was down, and that consumer confidence is
down.
I think I can tell you the reason that confidence is down. I think I can tell you why the markets
are saying we are not going to see profits, we are not going to see growth, we are not going to see jobs, because this body—appropriately
enough on April Fools’ Day—passed a budget resolution saying that we would increase taxes a whopping $273 billion.
The tax rates that would be jacked up under that resolution may contend that they will raise $273 billion.
But we have learned something about taxes, and that is that taxes discourage economic activity. … …If you look at the economic game plan that
President Clinton has asked for and that the majority in both Houses
have adopted, the economic game plan is a recipe for disaster. This so-called stimulus package, which I
think is more appropriately labeled an “emergency deficit increase package,” is going in exactly the opposite
direction of what is needed. …
…But with 273 billion dollar’s worth of tax increases, the Clinton plan,
endorsed by this body, turns back up again and by the year 2000 the deficit is back up to $300 billion a year…. …Our leader,
Senator Dole, with our Budget Committee leader, Senator Domenici, presented an alternative budget deficit reduction plan that
would save more than the Clinton budget adopted by this body would
save, and they did it without increasing taxes. …
…At some point, the Government is not going to be able to finance its debt. We are essentially
going to be bankrupt.
But, in any event, we are going to be putting a tremendous burden on our children and our children’s children.
They are going to have to pay taxes on that. They are not going to enjoy the standard of living
we have, or certainly the standard of living we would like to see them have, because our increased taxes in the budget resolution—the
increases in spending there, plus the increased spending that is proposed in this package before us—will go on to their
credit cards. And that is a dirty trick.
I see many young people coming to Washington, full of hope, full of optimism. I am embarrassed to
tell them that we have already put $4 trillion of debt on their credit cards. And during the first—and I trust the only—Clinton administration, we would add another $1.25 trillion to that debt.
The Republican members of this body are united. We have fought to bring some economic sense out
of our current budget. We have said: “Cut the additional spending. Don’t
jack up taxes, particularly when they are going to kill jobs.” …
…We talk about 7 percent unemployment. I believe that the taxes in this measure will drive
that unemployment figure even higher, and thus add to the deficit. Spending, if it is left unchecked, is
going to drive the deficit back up even with taxes.
We believe the time has come to get serious about the deficit. And the only way to get serious is
to cut spending. …
…The American people are tired of the politics of the past, where Congress continued to vote more and more money
without regard to revenues. The tax-and-spend philosophy has not worked. We are attempting
to keep faith with the American people who thought we would get a handle on spending. If we spend money now, and more money that the Government
does not have, we will leave the bill for someone else down the road—and that is our children. Mr. President, there is much more
that could be said about this, but I know others want to speak.”
Senator Bond painted a very scary picture of what would happen to the American economy and the federal budget if President Clinton’s economic
package was enacted into law, and he didn’t even hint at a link between the Reagan tax
cuts and the soaring budget deficits. Senator Byrd, however saw both the past and the future through very
different lenses than Senator Bond. Excerpts from Senator Byrd’s remarks are reproduced below.
“Mr.
Byrd. Mr. President, the distinguished Senator said the time has come to get serious about the deficit. Mr. President, let us go back
over the past 12 years and talk about this deficit that the distinguished Senator has said the time has come to get serious
about. Up until
the first fiscal year for which Mr. Reagan was responsible, there had
been no triple-digit billion-dollar deficit. Throughout the previous 39 administrations and the previous
192 years of history, this country had never run a triple-digit billion-dollar deficit. We had gotten into some double-digit billion-dollar
deficits under Mr. Ford, $70 billion, $50 billion the next year; under Mr. Carter, $55 billion, $38 billion, $73 billion,
and $74 billion.
Then came the Reagan era. The first fiscal year for which Mr.
Reagan was responsible, a $120 billion deficit. Never heard of before; unheard of before. The next year, $208 billion; the
next year, $186 billion; the next year, $222 billion; the next year; $238 billion; the next year, $169 billion; the next year,
$194 billion; the next year, $250 billion; the next year, $278 billion. That is the first fiscal year for which Mr. Bush
was responsible. He had been trained very well under Mr. Reagan, his
predecessor. So in his first
fiscal year for which he was responsible, a $278 billion deficit; the next year, $322 billion; the next year, $340 billion;
and the next year, $352 billion. Now, Mr. President, we hear
all of this palavering about the deficit; the time has come to get serous about the deficit. After all of this? Our new President is trying to get serious.
He has just been in office 73 days. He has sent up a package which is a well-balanced package.
It is composed of three elements: deficit reduction, long-term investment in infrastructure, and short-term jobs investment.
That is what the bill before the Senate does.
Now, the distinguished Senator from Missouri says, and I am quoting him: “The tax-and-spend philosophy will not
work.” Well, Mr.
President, what I have just shown about this chart concerning the Federal deficits, fiscal years 1979-93—there are the
deficits. We are told now that the tax and spend philosophy will not work. Under the
Reagan administration, under the Bush administration, we were following
a borrow and spend philosophy, a borrow and spend philosophy.
Mr. President, what happened to the total debt as a result of these deficits? When we run deficits,
we increase the debt. We are talking about the last 12 years. We are not talking about
the previous 192 years in this Republic’s history, during which time the country ran up a total of $932 billion in debt;
$932 billion. Less than $1 trillion. But because of the budgets that occurred during
the Reagan and Bush years, the triple-digit billion-dollar deficits,
we ran up a debt of $4,114 billion as of March 1, 1993.
So when the distinguished Senator says he is embarrassed when school children ask him, why do we not do something?
What is happening to our economy? He is embarrassed about the deficits; he is embarrassed about
the debt; he is embarrassed about the interest on the debt. Mr. President, there it is. Under
whose Presidencies did that debt mushroom, like the prophet’s gourd, overnight; from less than $1 trillion, from January
20, 1981, when President Reagan first took office, to $4,114 billion
on March 1 of this year?
Tell the schoolchildren about that. Tell them when the deficits occurred. Tell
them under whose administration those deficits occurred.
Mr. President, when those schoolchildren talk to the Senator from Missouri he is going to tell them about the interest
on that debt, and rightly so. But the interest on the debt when Mr. Reagan took office was $69 billion in that year. And in fiscal year 1993 it is $198.7
billion. Almost $199 billion. Almost $200 billion. So, Mr. President, tell those children—I hope
the Senator will not be embarrassed to tell them when those deficits occurred, when that debt quadrupled, and when the interest
on the debt rose from $69 billion to almost $200 billion.
That is a hidden tax, $200 billion a year. That is a hidden tax, a hidden tax. And
it is caused by those burgeoning deficits that took place over the last 12 years—a hidden tax.
This President is trying to do something about that hidden tax. He is trying to reduce the budget
deficits and eventually, in time, to reduce the debt and concomitantly, the interest on the debt. So I
just hope what I said will be helpful to the distinguished Senator from Missouri when he faces those children who are—embarrassed
about the deficits.
My grandchildren, my two daughters, and my two sons-in-law are embarrassed, too, about the debt. But
I tell them how it rose. And the President, this President who has been in office just 73 days—73
days—is trying to do something about it. …
…Let this President have a chance. Give him a chance. “
The Clinton economic plan, the 1993 Budget Reconciliation Act, was passed without a single Republican vote in either the House or the Senate. Vice
President Gore’s tie-breaking vote was required to pass the measure in the Senate on August 6, 1993, and President Clinton
signed the legislation into law four days later. Passage of the Clinton economic plan marked a major historic turning point. It reversed
12 years of supply-side economics, more commonly known as Reaganomics. In
addition, it committed the nation to a path of fiscal discipline that ultimately erased the massive budget deficits. With
the benefit of hindsight, let’s look at the economic record of the Clinton administration. In terms of the federal budget, the record $340.5 billion non-Social Security deficit in the last year of the Bush presidency was transformed into a record non-Social Security
surplus of $86.4 billion in 2000...
CHAPTER FIVEThe Policies
of George W. Bush When George W. Bush became president on January 20, 2001, many economists were worried that his policies would have a
negative impact on the economy and the federal budget. These fears turned out to be well founded.
The nation was about to head into eight years of the most irresponsible and damaging economic policies in the history
of the nation. During his last year, the catastrophic financial meltdown of 2008 occurred along with the
worst world-wide recession since the Great Depression of the 1930s. In addition to misrepresenting the financial status of the federal budget,
President George W. Bush also misrepresented the potential economic
effects of his proposed tax cut. On February 8, in an effort to stampede his tax cut through Congress,
Bush suggested that the economy was headed for trouble which his tax cut could prevent. Speaking at a Rose
Garden ceremony, Bush said, “A warning light is flashing on the dashboard of our economy. And we
can’t just drive on and hope for the best. We must act without delay.” The
president said his tax-cut proposal would “jump-start the economy,” and he argued that swift passage of his plan
by Congress could make the difference between growth and recession. Many
observers were shocked that a new president, who had been in office less than three weeks, would make such an irresponsible
statement and risk spooking the markets and lowering consumer confidence. When Roosevelt became President
during the depth of the Great Depression, he said, “The only thing we have to fear
is fear itself,” in an effort to calm the public and build optimism. The
fields of economics and psychology are so interwoven that if enough Americans come to believe that the nation is about to
enter into a recession, their behavior will actually cause a recession. People will respond to their fears
by cutting back on spending in preparation for anticipated layoffs, and as new orders to factories begin to decline, workers
will indeed be laid off. Using scare tactics to get a tax cut enacted was inexcusable. America was at a fork in the road in the year 2000.
We could not go back and undo those terrible deficits. The weight of the $4.6 trillion that had
been added to our national debt in the previous 19 years would have
to be carried by the current and all future generations. But we did not have to add any significant new
debt in the future. The tax structure and the government spending level were approximately in balance,
and they would have remained in balance in the future unless we did something to throw them out of balance. It
was a time to follow a stable economic course that was fiscally sound. If
the American people wanted to increase the level of government spending, then they would have had to be willing to support
an increase in taxes to pay for that new spending. On the other hand, if the people collectively decided
that they wanted a tax cut, they would also have to agree to a reduction in government spending equal to the reduction in
taxes. By so doing, the nation’s finances could have remained stable. We were
stuck with the massive debt that we had accumulated in the past, and it would have been desirable for the government to set
up a long-term plan for gradually paying down that debt. But, at the very least, we as a nation should
have drawn a line in the sand that read, “NO ADDITIONAL DEBT.” The
dire financial state the nation was in as a result of the large Reagan tax
cuts, that were not matched by spending cuts, was crystal clear when President George H.W. Bush vacated the oval office. The beneficial effects of the Clinton deficit reduction package, which had totally eliminated the deficits by 1999, were equally clear.
We, as a nation had gotten ourselves into deep financial trouble during the 12 years of Reagan-Bush, but we were in
a position, in 2000, to chart a course that would avoid a repeat of past mistakes. But
George W. Bush was determined to return the nation to a new round of
Reaganomics. He used the budget-surplus myth, created by Clinton, to convince the public that the government had massive amounts of surplus money which should be
returned to the people in the form of tax cuts. There was no surplus money, and any tax cut would lead to new deficits unless
offset by reduced spending. Yet, Bush lied to the American people about the financial status of the government
on a scale probably unprecedented in American history. He told enough lies to make Pinocchio’s
nose look short, and his performance as a con-artist rivaled that of Bernie Madoff. Bush said, “My budget protects
all $2.6 trillion of the Social Security surplus for Social Security, and for Social Security alone.” However, Bush spent
every dime of the Social Security surplus that came in during his eight years as president. He said he
would pay down $2 trillion of the national debt. Instead, he added
more than $5 trillion to the debt. Americans
always want to give a new president the benefit of any doubt, and they assume that the president is honorable and will take
actions that are in the best interest of the country and the American people. They had no way of knowing
that President Bush was lying to them. Economists and
some members of Congress, including at least a few Republicans, were warning that enactment of the Bush tax cut would lead
to a new round of huge budget deficits and resume the skyrocketing of the national debt.
However, why should the public take the word of these people over that of their president?...
CHAPTER SIX Tax Cuts and Job Creation
If you say something that people want to believe enough times, people begin to believe it.
For example, back during the days of the budget-surplus myth, the American people were told over and over that the
government had huge amounts of surplus money. They were told by Bill Clinton, Al Gore, George W. Bush, and many members of Congress. Journalists just seemed to accept the myth as true so they passed the good news on to
everyone who would listen. Almost everybody got into the act, and organizations began running ads lobbying
for part of the loot. Of course,
we know today that there was never any significant true surplus except for the temporary planned surpluses in the Social Security program that resulted from the 1983 Social
Security tax increase. This money was specifically earmarked for the funding of the retirement of the baby-boom
generation, and was not supposed to be used for any purpose other than paying Social Security benefits. The
tiny $1.9 billion non-Social Security surplus of
1999 and the larger surplus of $86.4 billion in 2000 were the only non-Social Security surpluses of the past 40 years, and
they were not even large enough to offset the deficits of 1997 and 1998.
The whole budget surplus fantasy was a hoax against the American people. Essentially, it was a very
BIG LIE told by many people. Some of them may have been so poorly informed about the budget
situation that they actually believed what they were saying. But not the top leadership. They
willfully and knowingly deceived the American public.
Another lie is that tax cuts of any kind stimulate the economy and result in the creation of many jobs.
Tax cuts that put money into the hands of consumers who are not buying because they are unemployed, or because they
are on a very tight budget, can stimulate the economy and create jobs. However, tax cuts that go to the
super rich, who already have almost everything that money can buy, will have little or no positive effect on the economy or
job creation. They will, however, lead to large budget deficits and a soaring national debt. When the economy is in a recession, with high levels of unemployment, the most
effective way of giving the economy a boost is to put money into the hands of consumers who make up more than two-thirds of
the total demand in the economy. The simplest and most effective way to accomplish this goal is through
temporary one-time tax rebates. For example, a check for $500, might be sent to each American taxpayer,
most of whom would probably spend the rebate. Since it is a one-time rebate, and tax
rates are not changed, it would have a very limited effect on deficits over the long run. It would
give the economy a jump start which is all that is needed to stimulate it out of recession. If
the primary goal of the tax rebate is to improve the economy, and policy makers don’t get all caught up in the politics
of who should get how much in terms of fairness, a strong case can be made for targeting most of the tax rebate to those people
in the lowest income brackets who will spend almost 100 percent of the rebate on consumer goods and services.
As consumer spending increases, and new orders begin coming into factories, the employers will begin calling back laid-off
workers so they can increase production. When the newly recalled workers begin getting paychecks again,
they will increase their spending, causing still more unemployed workers to be recalled. This process can
continue until the economy once again reaches full employment. If the first tax rebate
is not sufficient stimulus, then another rebate can be used to complete the job. When
consumer demand is high, employers hire additional workers in order to fill the demand. This is the way
that jobs get created. The Bush position that you should give tax breaks to businesses so they will create
jobs is just plain wrong. No amount of tax relief for businesses will cause them to create jobs if they
cannot sell their products. Demand is what creates
jobs. If a company has such strong demand for its products that it is turning away customers for lack of inventory, you can
be absolutely sure that it will expand its productive capacity to meet the demand, and not a penny of government tax relief
is necessary for them to do this. Tax cuts for the rich may be good politics for a
president who gets much of his financial support from such people, but it is lousy economics. Rich people
don’t have a lot of unmet needs that they will fill only if they get a tax cut. Most of them already
have almost everything they want, in terms of material goods and services, so when the rich get a tax cut they usually just
turn it over to their accountant with instructions to find a good place to invest it. One of those “good
places to invest” is with the United States Treasury. Because of the tax cuts during the Reagan-Bush administrations, and
those under George W. Bush, the national debt has
soared beyond anything that any reasonable person could have imagined at the time that Reagan first became President.
The government must constantly finance and refinance this huge debt by borrowing. Since the government
has to finance the deficits, no matter how high the interest rate, it will always be competing with businesses and consumers
for funds. This competition tends to drive interest rates up over the long run. What happens to a lot of the money that the rich receive in the form
of big tax cuts is that they loan it right back to the government and earn interest on it by investing it in United States
Treasury notes and bonds. Money that was coming in to the government
in the form of tax revenue before, now comes in the form of borrowed money on which interest must be paid. The
key point here is that large tax cuts to the rich play almost no role in the creation of new jobs. For
tax cuts to stimulate the economy and create jobs, they must result in new spending for goods and services...
CHAPTER SEVEN The Financial
Status of the U.S. Government
“The practical implications of this is bankruptcy for the United States,”
Republican Senator Judd Gregg of
New Hampshire said on Sunday, March 22, 2009, during a CNN appearance.
Senator Gregg was referring to the Obama administration’s recently released budget proposal. “If we maintain the proposals
that are in this budget over the ten-year period that this budget covers,” Gregg continued, “This country will
go bankrupt. People will not buy our debt, our dollar will become devalued.”
These were harsh words, coming from the Republican Senator who was offered, but turned down, the post of Obama’s
Secretary of Commerce. However, Senator Gregg is known as one of the keenest fiscal minds on Capitol Hill,
so nobody took his warning lightly.
News coverage of the world banking crisis and the severe recession, has been so extensive that these problems have
become almost common knowledge. However, the financial problems of the United States government, which
have been more than two decades in the making, are not well known.
As pointed out previously, the national debt reached the $1
trillion mark for the very first time in early 1981. This $1 trillion represented the cumulative budget
deficits of all previous presidents. At that rate of growth, the national debt did not pose a significant
problem for our government, and if the debt had continued to grow only at that rate, it would never have posed such a problem.
But things changed dramatically. The national debt doubled in just five years, and quadrupled to
$4 trillion within twelve years. And, by early 2009, the public debt had skyrocketed to $11 trillion! For twenty of the past twenty-eight years, mainstream economists
have been shut out of economic policymaking, and conservative politicians have wreaked havoc with the federal budget.
Imagine what might have happened if foreign policy had been conducted during that period by politicians without any
input from the State Department or Pentagon, and you might be able to grasp the damage done to the economy and the federal
budget by politicians during the twelve years of the Reagan-Bush presidencies and again during the eight years under President George W. Bush. Many economists, including some recipients
of the Nobel Prize in the field, did everything within their power to warn the public about impending disaster during the
entire period, but the conservative politicians continued their irresponsible fiscal policies anyway. The deficits during
the first six years of Clinton’s presidency raised the debt by an additional $1.6
trillion, but it held steady during Clinton’s last two years when there were actually small surpluses in the budget.
Thus the national debt, that had been just $1 trillion in 1981, was $5.6 trillion when
Clinton left office. The increase in the
national debt from just $1 trillion in 1981 to $5.6 trillion just 19
years later was an atrocity against the American people. And it would have cost the nation dearly for decades to come even
if the deficit spending had come to a permanent halt in 2000. The interest paid on the national debt for
the year, 2000, was an alarming $362 billion. That was almost $1 billion per day! Since
there is little likelihood that any of the national debt will ever be repaid, Americans for generations to come will have
to continue to pay at least $1 billion per day just for the $5.6 trillion in debt that existed in 2000. The
nation should have learned a bitter lesson about what happens when the government cuts taxes without cutting spending.
Reaganomics had turned out to be a colossal failure.
During the eight years of the Clinton presidency, competent
mainstream professional economists once again played a major role in economic policy making. The Clinton
deficit reduction package, which included both spending cuts and tax increases, resulted in a tax structure that was once
again capable of generating a balanced budget, or small surpluses, at the full-employment level of output. During the first six years of the Clinton presidency, the annual budget deficits steadily diminished, as the economy grew
and unemployment declined. Finally, in 1999 and 2000, the economy was operating near maximum capacity,
and the nation’s tax structure was generating enough revenue to eliminate deficits. If the tax structure
and spending had continued at 2000 levels, the federal budget would have experienced moderate deficits during the lower stages
of the business cycle, when unemployment was rising, and approximately balanced budgets at the peak of the business cycle. The surpluses of 1999 and 2000 followed
38 consecutive years of budget deficits. It was a time for celebration. The damage done
by all those past deficits was in no way undone by the two surplus years. The monstrous deficits from the
past were very visible in the form of the $5.6 trillion national debt. But
the nation had the opportunity to cap the debt and avoid further deficit spending.
President Clinton’s policies had pulled the nation back from the brink that
we were so close to when he became President. If his successor had continued to follow sound economic policies
the economic outlook would have been reasonably good. But, unfortunately, as was pointed out in detail
in Chapter 5, George W. Bush had other plans for America.
Some political observers have referred to Bush’s first term in office as “Reagan’s third term.” Despite
the terrible damage done to the economy and the federal budget by twelve years of Reaganomics, George W. Bush picked
up right where his father had left off, and led the nation back toward the brink. When we got there, he
led us over the edge, taking the whole world with us...
CHAPTER EIGHT Countdown to Financial
Meltdown People around the world are shocked
and confused as a result of the financial and economic crises which have brought so much suffering. They
cannot begin to comprehend how the world financial system and the economies of almost all nations could have deteriorated
so much so fast. Prior to 2008, there was little indication to the average person that anything was wrong
with the financial system, so how could things have changed so much in such a short period of time?
Some economists had been warning about irresponsible government policies for years, and, at least a few of them, warned
that, if we continued with the reckless policies, a day of reckoning would eventually come. But I don’t
think many economists thought it would come so soon or be so severe.
With the benefit of hindsight, we can go back and see that there were at least a few hints of trouble more than a year
before the actual Wall Street meltdown. On July 19, 2007, Federal Reserve Chairman, Ben Bernanke, told
the United States Senate Banking Committee that there might be as much as $100 billion in losses associated with subprime
mortgages. This may have raised some concerns in the minds of members of Congress, but average citizens
never knew about the warning.
On August 22, 2007, Countrywide Financial Corporation, the biggest U.S. mortgage lender, sold $2 billion of preferred
stock to Bank of America in order to bolster its finances. This raised a lot of eyebrows
in the financial industry, and some began to wonder if any other large financial institutions were in trouble.
The anxiety in the banking community was greatly heightened when on January 11, 2008, Bank of America agreed to buy
Countrywide for approximately $4 billion.
A month later, it became clear that Countrywide was not just an isolated case when Bear Stearns became
insolvent and was purchased by JP Morgan Chase for 7 percent of its market value in a
sale brokered by the Fed and the U.S. Treasury Department. Just 4 months later, IndyMac Bancorp,
Inc., the second-biggest independent U.S. mortgage lender, was seized by federal regulators after a run by depositors
depleted its cash.
On September 7, 2008 the U.S. government seized control of Fannie Mae and Freddie Mac, the largest
U.S. mortgage-finance companies. On September 15, Lehman Brothers Holdings, Inc. filed
the largest bankruptcy in history, and on the same day, Bank of America agreed to acquire Merrill Lynch
for about $50 billion. The following day, September 16, American International Group, Inc. (AIG) accepted
an $85 billion loan from the Federal Reserve to avert the worst financial collapse in history, and the government took over
the company. As
one bank after another failed in the United States in mid-September 2008, banks in other countries, around the world, were
also failing. The world’s financial system was collapsing, and there was little anyone could do to
halt the momentum. The unthinkable was happening.
On September 21, 2008 Goldman Sachs Group and Morgan Stanley received approval
to become commercial banks regulated by the Fed in order to widen their sources of funding. On September
26, Washington Mutual, Inc. was seized by federal regulators and its assets were sold to JPMorgan Chase. This
was the biggest United States bank failure in history.
During September, October, and November, 2008, there was so much bad economic news, that even the most vocal
Pollyanna’s were having trouble seeing a silver lining in the dark cloud that had descended upon the world.
As the election passed and President Barack Obama was inaugurated on January 20, the mood throughout
America was very different from what it would have been in the absence of the avalanche of bad economic news.
Although much
of the financial system collapse occurred over a relatively short period of time, the factors that led to the collapse had
been years in the making. Many economists believe that one of the biggest factors in the collapse
was the deregulation of banks which resulted from the enactment of the Gramm-Leach-Bliley Act in 1999.
This law repealed part of the 1933 Glass-Steagall Act, which was passed during the Great Depression in
an effort to prevent a repeat of the banking crisis of the 1930s. The Glass Steagall Act had placed strict
regulations on the banking industry, and some argued that removing those regulations was very risky. North Dakota Senator
Byron Dorgan warned at the time, “I think we will look back in 10 years’ time and say we should
not have done this, but we did because we forgot the lessons of the past.”
The Gramm-Leach-Bliley
Act was signed into law by President Bill Clinton on November 12, 1999. The
final version of the bill was passed by the Senate 90-8 and by the House 362-57. Although the legislation
was sponsored by the Republicans, and initially received stiff opposition from Congressional Democrats, the final version
was overwhelmingly supported by both parties. Therefore, if this legislation was one of the primary causes
of the Wall Street meltdown, members of Congress from both parties, and Democratic President Bill Clinton all share the blame.
The triggering
mechanism for the ultimate financial collapse was the subprime mortgage crisis. In order to understand
how this unfolded, it is necessary first to talk about how home mortgage loans were transformed into mortgage-backed securities
by Wall Street investment firms...
CHAPTER NINE A Voice Crying in the Wilderness
As stated in the preface, I appeared on CNN with
Lou Waters to discuss my book, The Alleged Budget Surplus, Social Security, & Voodoo Economics on
September 27, 2000. When I tried to explain that there was really no significant budget surplus,
except for the Social Security surplus, and told Waters that the government was using Social Security money
for other programs, he looked at me in disbelief.
“We’re not hearing any of this in the news,” Waters said.
“I’m involved in the news. Are you a voice crying in the wilderness? And if not, why haven’t we seen a presidential candidate,
any presidential candidate, talk about this?”
I was a voice crying in the wilderness in September 2000, and I have continued to be such a voice ever since. I have
tried my best to alert the American public to the ongoing raiding of the Social Security trust fund and
the runaway budget deficits, but almost nobody wants to listen.
Actually, I have been a voice crying in the wilderness for more than three decades. After completing
my Ph.D. in Economics at Indiana University in 1970, I began teaching economics to college students at Eastern Illinois University.
That is when I first became aware of just how economically illiterate the American population is. I
saw it in my students, in the community, and even among my teaching colleagues in other academic fields. Basic economic principles,
that one has to understand in order to make any sense out of the economic proposals being put forth by political leaders,
were either poorly understood, or not understood at all, by anyone except trained economists.
I saw this as a major failure of the American education system. My children attended what was otherwise
a very good high school in the University town. But, to my astonishment, the local high school did not
offer even an elective course in economics. I was told that the primary reason they didn’t offer
economics was that none of the teachers wanted to teach the subject because none of them had received any training in the
field. Of course, the
school taught chemistry, physics, calculus, astronomy, foreign languages, and just about every other course that one would
expect to see offered by a high-quality high school. The only gap in their curriculum that I was aware
of was economics, a subject that would affect the lives and livelihoods of students almost more than any other subject that
the school taught.
I was also disappointed in how few college students were required to take a course in economics. Only
certain majors required the study of economics. Most students could become a college graduate without ever
coming face to face with the subject of economics. Not only that, but most of my colleagues, in other departments, had been
able to obtain a Ph.D. degree in their field without ever being exposed to economics.
I couldn’t understand why a course in economics was not a general education requirement that every college graduate
would have to take. How could we consider anyone well-educated who had no idea of what causes unemployment
or inflation, and didn’t know the difference between a budget deficit and the national debt?
It was in 1975, that I resolved to dedicate my career as an economist to the cause of reducing economic illiteracy and
promoting economic education. I began by writing the book, Understanding Inflation and Unemployment,
which became an alternate selection of Fortune Book Club when it was published in 1976. This
was a time when the United States was experiencing a combination of both high unemployment and high inflation.
Historically, there had been a tradeoff relationship between inflation and unemployment such that a country usually
did not have to deal with high levels of both at the same time. My book represented an effort to explain
the special circumstances that had led to the inflation-unemployment problems of the 1970s.
In 1986, Random House published my high school economics textbook, Understanding Economics, which
was used in more than 600 schools nationwide. I felt good about the contribution the book was making toward
reducing economic illiteracy at the high school level but, of course, it couldn’t do any good in high
schools that continued to refuse to offer their students the opportunity to study economics.
In 1996, the first edition of my book, Demystifying Economics: The Book That Makes Economics Accessible to Everyone,
was published. A second edition was published in 2000, and an expanded third edition was published in 2008.
That book is designed to make economics accessible to people who have never had any formal training in the subject,
and I think it has been successful in that regard. In the words of the Louisville Courier-Journal,
“…Smith provides an easily
understood layman’s approach to the perceived mysteries of economics. The book has the potential
to be a serious weapon in the battle against economic illiteracy…I believe that
readers of Demystifying Economics will learn both what economics is and how it can contribute to their understanding
of the world.”
In 1990, I began writing a weekly self-syndicated newspaper column on the economy called, “Economic Alert.”
I felt that somebody had to do something to educate the public, so I began warning my readers about the disastrous
economic path the nation was following. My column, which
appeared in 30 newspapers, soon became very controversial, and I got many hostile letters from Bush supporters. I was labeled
a “Bush Basher,” and was called “un-American,” a “Marxist” and numerous other choice names.
Letters to the editor of newspapers that carried my column urged the newspapers to stop running the column, and some
did. I was amazed at the hostility that came my way simply because I was pointing out the flaws of Reaganomics and
warning that a day of reckoning would eventually come if we didn’t change course. As the economic malpractice
continued undeterred, I felt compelled to do more than just write about the problem. I drafted a proposal
for the creation of a National Economic Advisory Council that would serve as a watchdog for the American
people to ensure that sound economic policies were followed. I took the proposal to my congressman and
urged him to introduce legislation for the creation of such a council. I expressed a desire for him to
communicate the proposal to Senator Daniel Moynihan to see if he might be interested in sponsoring such legislation in the
Senate. Congressman Bruce talked
about the proposal on the floor of the House, and it was inserted into the Congressional Record. A portion of page E2561 of
the July 31, 1990 Congressional Record, which includes my proposal, is reproduced below...
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