Work and Days

The Psychology of Debt — and Obama’s Rendezvous with Political Reality

Debt Matters

Over the last two decades it became an article of popular faith that budget deficits did not matter that much. Conservatives began to talk of annual red-ink in vague terms of percentages of the gross domestic product rather than in real billions of dollars — as in “Don’t worry about the 2004 shortfall of $605 billion; it’s still only 5.3 percent of GDP.”

Ronald Reagan ran large deficits; so for a while did Bill Clinton. Both Bushes did every year. And Barack Obama, who admittedly came to office amid a liquidity crisis that called for fiscal stimulus, trumped them all with the largest proposed budgetary shortfall in the nation’s history that may hit $2 trillion dollars.

Economists differ on the precise percentages of gross domestic product at which annual deficits began to drag down the economy. They argue over the degree to which mounting national debt is sustainable. And we are not even certain about the exact nature of American borrowing and the resultant pressure on world financial markets and global interest rates. Of course, some borrowing may be needed in times of recession.

Master Charge Nation

But lost in such economic talkfests are the psychological implications of large deficits upon the voters. It may be true that the American people care more about unemployment and inflation than deficits. Or maybe they are not all that concerned about the interconnections between the former and the latter. But in recent years, as budget shortfalls soared, that old wisdom seems less and less compelling.

Consider the political effects of Bill Clinton’s two budget surplus years — and ignore the ongoing argument to what effect they were the result of creative accounting, not sustainable, or any of the other conservatives rationalizations use to deprecate the achievement. The truth is that they were, and are, now acccepted as unusual achievements.

Clinton’s Reprieve

So just assume that by hook and crook Clinton balanced the budget and examine the ensuing political fallout (We are talking politics now, not economics).

By the end of his term, the United States was headed into a recession. The president was mired in sexual scandal and had been impeached, and yet his ratings remained overwhelmingly positive. Clearly part of the Clintonian resilience was because Americans not only were relieved that they were not piling up debt on their children, but through modest surpluses were making some progress in paying down the national debt. And they gave Clinton credit (not just the Republican Congress that forced him to stop excessive spending), which trumped his otherwise deplorable behavior.

Privately we all calculate that our own mortgage debts can help on tax obligations given deductions for interest; and perhaps sometimes it is unwise to pay off old low-interest debts in times of inflation. But such rational thinking does not change the fact that Americans hate the debts they run up and feel imprisoned by the reality of owing lots of money. If it is in our evolving national DNA to borrow and spend what we don’t have; we are also equally repelled by what we’ve become.

Spendthrift Republicans Too

George W. Bush pleaded that deficits — and unprecedented large ones at that — were necessary in light of the downturn after 9/11, Katrina, the expense of two wars, and the new programs such as Homeland Security, No Child Left Behind, and the Medicare Prescription Drug benefit entitlement.

Yet what is forgotten is that Bush paid a terrible price for his deficit spending. His unpopularity was not entirely due to Iraq, but finally in large part to the notion that our national debt after eight years of unprecedented borrowing has soared to $11 trillion. He desperately tried to convince Americans that his tax cuts had stimulated the economy (quite true), and had led to greater aggregate revenue than ever before (quite amazingly so).

No matter. Spending increased, especially in the first term, to such levels that it nullified the revenue bonanzas from a growing economy stimulated by tax cuts, and left us larger in debt than ever before. Instead, the entire notion of supply-side economics was unduly discredited, as voters blamed tax cuts, not out of control spending, for the new unsustainable deficits.

They Did It!

Conservatives soon found themselves in the odd position of losing the previous high ground on fiscal sobriety, as big-spending, veto-free Congressional Democrats both welcomed deficits and yet blamed the Republican administration for them — as if childlike, they expected their own undisciplined budgets after 2006 to at least be vetoed by a conservative, more responsible presidential parent.

And if Bill Clinton had survived both Monica and a growing recession on the basis of his balanced budget, George Bush left office tagged with both an unpopular war and record borrowing.

Imagine, however, that Bush had limited federal spending to 2 percent annual increases, and by 2005 was submitting balanced budgets for the rest of his second term. The result would have been faith in the power of revenue enhancing tax cuts, criticism of the war deflected by the nation’s positive balance sheet, and reaffirmation of traditional Republican tight-fisted policies.

“Gorge that Beast!”

Barack Obama should pay particular attention to this morality tale, as his hyper-Keynesian advisors talk casually about a second stimulus, perhaps $9 trillion more in debt to come, and (more quietly) a new “gorge the beast” philosophy of running such record deficits with new spending that higher taxes on the more affluent will be necessary — and with such taxes the long desired equality of result and redistribution of national wealth through a punitive tax code.

Obama can talk endlessly about the “reset” button, the prior “mess”, and “Bush did it”. But as his uncontrollable deficits climb, so too will fall his approval ratings. And just as the voters could not be convinced of the idea of tax cuts leading to greater revenue, so too they will not be persuaded that massive federal spending was worth the additional $9 trillion in debt to come.

We Are the Only Game in Town

Right now various members of the Obama team promiscuously toss out ideas like lifting the income caps on payroll FICA tax, or adjusting the brackets up to nearly 40 percent, or adding a 2-4 percent surcharge on the “wealthy” — all on top of increases recently in state income and sales taxes. Do the math — as are small businesses that are putting off hiring and purchasing in fear that they may well be subject to an aggregate state and federal rate of nearly 70 percent on their income. Obama acts as if business has nowhere else to go, as if the only gate out of the corral for the proverbial lamb leads to the slaughterhouse.

Add in the depression-era rhetoric of ‘”spread the wealth” and “pay your fair share” talk, along with the idea that the new taxes will not even pay down the deficit, which will in fact soar and require both inflation and higher interest to pay it down. The result is a growing anger that higher taxes in this administration somehow still ensure higher deficits. So Clinton gave us high taxes and finally a surplus. Bush at least gave us tax cuts — but a large deficit. Obama gave us the highest taxes in recent memory and the highest deficits in our history. That is not a winning combination.

Balance the budget — and President Obama could, as Clinton, be forgiven for quite a lot. Run up record deficits, and the voters will give him even less empathy than they did George Bush. Just watch …