Back to Work

How has the America’s anti-government ethos evolved over the past four years?  

I got Bill Clinton’s new book Back to Work for Christmas and have just now been able to pop it open.  The opening section in his first chapter is wonderful.  He outlines how America’s growing opposition to the role of its own government doesn’t jive with reality.  Clinton writes that the 2010 midterm elections – which were the manifestation of such anti-government sentiments – “seemed to occur in a parallel universe of inflated rhetoric and ferocious but often inaccurate attacks that shed more heat than light”.  Republicans, or at least those that turned out for the elections, argued that the financial crash and the recession that followed, as well as the failure of the U.S. to fully recover from it less than eighteen months after the economy bottomed out, were caused by too much government taxing, spending and regulating, and that life would be restored if the government got out of our way.  As Clinton argues, these attacks were effective, but not all together accurate.  Here are three reasons why:

First, the financial meltdown happened because banks were overleveraged.  In other words, banks had too many risky investments, especially in terrible mortgages called “subprime” mortgages.  There simply wasn’t enough government oversight to prevent the banks from being too risky. If you want to understand the concept of leverage in the banking industry in two minutes click here. 

Second, the meltdown didn’t become a full-scale depression because the government acted to save the financial system from collapse.  The Federal Reserve made massive investments of about $1.2 trillion to stop the financial collapse.  Many people criticize the bailout, known as the Troubled Asset Relief Program (TARP), because of its cost.  In reality it didn’t cost much at all.  It was originally authorized to spend up to $700 billion.  In the end it only spent about $400 billion.  That’s still quite a bit you say?  As it turns out all of it has been paid back!  In fact, we’ve actually made a profit.  How many people walking down “main street” know this?  See Treasury article here.  Criticizing TARP for its cost just doesn’t match with reality. 

Third, according to most economic studies, the stimulus and the rescue of the auto industry succeeded in keeping unemployment 1.5 to 2 percent lower than it would have without it.  Most people inaccurately think that the stimulus was designed to restore the economy to normal levels.  This is partially the Obama Administration’s failure to effectively communicate with the America people. The stimulus wasn’t designed to do this. After the financial meltdown and damage that ensued, the total net loss was several trillion dollars.  The stimulus was $800 billion.  Once again, it wouldn’t make sense for a stimulus to return the economy to normal levels if it is less than half the size of the “hole” it’s trying to fill.  Rather, the stimulus was designed to put a floor under the collapse and begin the recovery. 

It’s an old argument now so I’ll keep it short, but it’s important to remember that those who are “anti-government” now, were painfully silent during the Bush Administration’s tenure in Washington.  They cut taxes and increased spending at roughly twice the rate that it had increased during Clinton’s eight years (thought I know these eight years were marked by unusually high economic growth for some reasons that might have been out of political control).    Also, by the end of Bush’s eight years we had doubled the national debt.  This all occurred before the financial meltdown.  I’m not writing this to blame President Bush.  I am simply asking where the anti-government enthusiasts were for those eight years.

The Takeaway:  While this is probably old news to a lot of you reading this, I bring it up because it is impossible to get out of the economic conundrum we’re in if we don’t understand how we got into it.