Then politicians, inspired by the ideals of market fundamentalism, and funded generously by the finance industry’s lobbyists, removed many of the rules. Finance became less transparent, less subject to public scrutiny. Principles of laissez-faire, which had been fashionable before the Great Depression, came back into vogue, but with new formulations.
When the Financial Crisis Inquiry Commission released its majority report on causes of the recent meltdown, its judgment resembled the conclusion of economists who studied causes of the Great Depression. “The crisis was the result of human action and inaction,” opined commissioners appointed by the Democrats. It was not caused by “Mother Nature.” The meltdown was “avoidable.” Millions of people suffered from investment declines, devalued homes, and lost jobs because Washington had created “a highway where there were neither speed limits nor neatly painted lines.” The commissioners essentially blamed market fundamentalism for the mess. They concluded that a “widely accepted faith in the self-correcting nature of markets” played a significant role in the meltdown.
Republican demands to restrain federal spending are now complicating efforts to mount a recovery. Economists who are aware of John Maynard Keynes’s insights recognize that deficit spending by the federal government is essential to jump-start a stalled economy. Keynes’s arguments about the value of a public stimulus seemed validated when a surge in federal expenditures during the Second World War helped to end the Great Depression quickly.
The Obama administration tried a Keynesian approach but in a timid way. Its “stimulus” package was small ($787 billion) in comparison to the size of the U.S. economy and in relation to the size of the economic downturn. Furthermore, nearly 40% of that stimulus package involved tax cuts (due to the administration’s efforts to win conservatives’ backing for its bill). Tax cuts are much less effective in revitalizing the economy than direct spending on infrastructure projects that employ many Americans who need a job.
The GOP’s oft-stated goal of reducing the national debt is important, but reviving the economy and creating jobs are the more immediate needs. If a Keynesian stimulus works, it can lead to greater prosperity and increased tax revenues (in short, a faster achievement of debt reduction).
Reform of the tax code can also reduce the debt by eliminating subsidies, ending special favors for corporations, and generally increasing revenues. But Republicans will have none of that. Many of them have signed pledges affirming their opposition to all tax increases.
Bill Clinton’s administration supported tax increases in 1993 to deal with budget deficits. The Democrats’ measure passed without a single Republican vote in the House and Senate. That legislation aided the achievement of balanced budgets and sustained prosperity in the late 1990s. Today’s Republicans refuse to learn from that historical experience. They govern through ironclad pledges rather than pragmatic decision-making about taxing, spending, and debt reduction.
The most recent GOP antics have amplified America’s financial crisis. Republicans refused to deal with President Obama’s offer of a “grand bargain” that included $4 trillion in debt reduction. The GOP turned away principally because Obama’s proposal included some tax increases. Rather than compromise, Republicans took the nation to the brink, threatening to create the first major default in the country’s history.
Now we see the consequences of my-way-or-the-highway politics. Investors are no longer confident that the U.S. will honor its financial obligations after reading about the near-default. Stock markets around the world are reacting nervously to reports about the S & P’s downgrade of America’s rating. Worries are growing that the rating agency’s decision will force businesses and local governments in the U.S. to borrow at higher interest rates.
Republicans argued often that leaders in Washington needed to take strong measures to reduce the national debt. Ironically, their risky gamble of playing politics with the debt ceiling has added emotion to the global panic. In the long run, the GOP’s game of chicken regarding the debt ceiling seems likely to expand the U.S. debt.
Republicans’ efforts to lecture the nation on the dangers of profligate spending constitute an extraordinary case of political chutzpah. The GOP gave us two huge tax cuts in 2001 and 2003 that benefited the rich especially and destroyed the budget surplus. Republicans in the White House and Congress rushed America into an unnecessary war in Iraq but kept the costs of that military engagement off the books. They delivered a costly drug benefit for senior citizens but did not provide ways to pay for it. Republicans vigorously advocated deregulation over many years, fostering the recklessness that produced a financial breakdown and Great Recession.
Yet, as the GOP’s House Speaker, John Boehner, warned recently, we must “stop the spending binge that’s hurting growth.” Evidently, Boehner is not troubled by contradictions.
We could not do much in recent years about the looming economic crisis in Europe. But we did have had considerable control over our own economic destiny in that period, and we frequently squandered opportunities to manage it effectively.
George Soros must not be surprised by recent developments. When he wrote about market fundamentalism in the 1990s, Soros predicted that excessive allegiance to unregulated markets could someday produce a global meltdown. The crash he anticipated occurred in 2007-2009. We may now be watching a second act in that tragic drama.
Robert Brent Toplin
Robert Brent Toplin has published a dozen books about history and politics. He is currently completing a book about differences between Democratic and Republican approaches to economic controversies from the time of the Great Depression to the present.