Thursday, February 10, 2011

Terrance Heath: Revisiting the Reagan Nightmare

Revisiting the Reagan Nightmare
by Terrance Heath
Campaign for America's Future


And it started with Reagan. Anyone who's wringing their hands about America's debt and China's ownership of it has Reagan to thank, as Reagan's former budget director David Stockman recently explained to David Corn.

Here's how Stockman tells the tale. In the '80s, Reagan and his White House crew were eager to cut income taxes across the board. The aim, he asserts, was to fix the slumping economy, not to starve the beast of big government. Republican leaders on the Hill were initially skeptical—they insisted that the White House pass spending cuts before Congress tackled the tax side. "The honest-to-goodness fact," Stockman says, "is that in February 1981, there wasn't close to a Republican majority for tax cuts without any accompanying or coupled spending cuts. The idea of supply-side in its purest form"—that tax cuts fuel economic growth that yields increased tax revenues—"was only embraced by a handful of junior Republicans, plus Jack Kemp."

The Reagan administration hardly minded proposing massive cuts to both taxes and spending. But then things went haywire, Stockman notes. The tax cut ballooned from $500 billion over five years to $1 trillion after lobbyists added special-interest tax breaks for various industries. And on the spending side, the Reagan administration went hog-wild throwing money at the Pentagon. The inevitable happened: The deficit ballooned.

...The new doctrine got a boost when it turned out you didn't have to match tax cuts with spending cuts: The Federal Reserve was able to sell the nation's growing debt to China and others. "It totally anesthetized the political system to the costs of deficit spending," Stockman says. "Therefore the simplistic and reckless idea that the way to stimulate the economy is to cut taxes anytime, anywhere, for any reason, became embedded [in the GOP]. It has become a religion, it has become a catechism. It's become a mindless incantation."

As Paul Krugman wrote 2009, we weren't always a nation of big debts. He went on to explain how it started with Reagan.

“This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot.” So declared Ronald Reagan in 1982, as he signed the Garn-St. Germain Depository Institutions Act.

He was, as it happened, wrong about solving the problems of the thrifts. On the contrary, the bill turned the modest-sized troubles of savings-and-loan institutions into an utter catastrophe. But he was right about the legislation’s significance. And as for that jackpot — well, it finally came more than 25 years later, in the form of the worst economic crisis since the Great Depression.

...The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry — whose deposits were federally insured — a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst. By the time the government closed the books on the affair, taxpayers had lost $130 billion, back when that was a lot of money.

But there was also a longer-term effect. Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending — restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.

These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.

Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.

Revisiting the Reagan ruins earlier this week, Robert Borosage explained that Reagan's de-regulatory fervor essentially gutted consumer protections.

Deregulation gutted consumer protection, environmental protection, workplace safety and the right to organize under Reagan. It led to many scandals that made his administration one of the most corrupt in history, with a record 138 officials investigated, indicted or convicted. But the biggest change was deregulation of banking, which led to successive financial wildings and crashes that have cost taxpayers literally trillions. The first was the Savings and Loan debacle that followed on Reagan's reforms that empowered banksters to gamble with other people's money, with their losses guaranteed by the federal government.

Working people's share of the benefits from increased productivity took a sudden turn down.

In the column quoted above Krugman also wrote that the increase in public debt was dwarfed by the increase in private debt, made possible by Reagan's deregulation. "It's the gift that keeps on taking," Krugman wrote. Taking, that is, from working people.

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