As the campaign season showed, a considerable portion of Americans believe that the gravest impediment to future prosperity is government spending and its twin accomplices, debt and deficits. The Tea Party built a populist insurgency on this premise. Said Peter Boyce, a Tea Party congressional candidate from New Jersey: "Federal spending must be drastically reduced. To ignore this issue is a crime against our children and grandchildren."
That view is echoed by the Republican Party's Pledge to America, which vowed to end the spending run amok in health care bills and bailouts. Prominent Democrats like Blackstone Group founder Pete Peterson have been equally vocal about the dangers of escalating federal debt.
Calls for curtailing spending were given a boost by the coalition British government led by David Cameron, which announced sweeping budget cuts, including reductions in defense spending and child-care tax creditspart of a dramatic wave of belt-tightening that's sweeping Europe.
The net result is that the days of government stimulus appear over at precisely the time it may be needed most. The U.S. economy is stuck in second gear, but the populist view dictates that more spending is a culprit and can't be a solution.
That's a logical position given the harm that excessive debt can do. Who would argue for more debt, more spending, when the tab is approaching 100% of our $14.6 trillion GDP? The national-debt clock near New York City's Times Square had to remove the dollar sign in 2008 to make way for a 10th digit as the figure surpassed $10 trillion.
The national debt is a big number, but it isn't excessive. On a relative basis, the federal debt burden has hardly changed over the past 20 years. In fact, while the absolute amount of debt has ballooned, the percentage of the federal budget spent servicing that debt has actually decreased. That's right: in 2009, net interest payments on the debt decreased from the year before, and the overall percentage the U.S. spends to service its debt (currently less than 3% of GDP) is lower than it was in the late 1980s and most of the 1990s.
The potent populist reaction against debt and deficits has deep cultural roots, and rational argument about them is as rare as levelheaded discussion of sex and religion. But there is also a history of irrational austerity. As Liaquat Ahamed charted in Lords of Finance, his Pulitzer-winning account of central bankers' policymaking before the Great Depression, the orthodoxy of austerity and budget cutting hobbled the world and led to a decade of deflation and depression.
That lesson is mostly forgotten. Yes, former White House economic adviser Christina Romer is urging new spending to goose anemic domestic demand. The Federal Reserve under Ben Bernanke is busy increasing the money supply to encourage consumption. But with the public agitated over bailouts, Congress appears intractably opposed to further spending.
This is a classic case of fighting the last warand forgetting those elements of the past that don't support the current fashion. Oddly, few would argue against deficit spending in a time of war: crises demand different approaches. But economic crises touch more-discordant chords. The Tea Party has woven a story of government overreach that includes deficits, health care, job loss and general disdain for Washington and Wall Street elitism. It's a simple narrative fueled by legitimate outrage at the cozy system of influence that characterizes politics today. But as economic policy, it is the 2010 version of what the blind, rigid bankers of the 1920s and '30s offeredand it will sink an already leaking ship.
Bizarrely, the populist, anti-elitist Tea Party has embraced the economic orthodoxy of the elite that regards deficits as the gravest threat to prosperity even as interest rates plunge and the cost of those large deficits decreases. The result? A nation with enviable riches, the U.S., is handcuffed in its ability to channel those riches to jump-start its system. Debt is simply a cost, and at current rates, with the dollar as the world's reserve currency, few can rationally argue that America today lacks the means to spend. We lack the will.
Debt can be foolish, as the housing crisis demonstrated. But it can be a powerful tool when properly used. Government is not the answer, but wise fiscal policyfocused on investmentis a spark plug when activity sputters. Recent American governments have squandered trust. Even so, any business leader will tell you that you can't cut your way to prosperity. Yet that is now the preferred recipe for the U.S.
If the philosophy of austerity dictates policy from now on, our children and grandchildren will not praise us for the reduced deficits we leave them; they will reproach us for refusing to mobilize our vast resources to reinvent ourselves. But we were being prudent, we will say. No, they will reply, you were being cheap. You were running scared.