The book That Used To Be Us has two authors, Thomas Friedman and Michael Mandlebaum. We used Mr. Friedman’s name in our title for brevity and also because he seems to the TV face of the book. In the rest of this article, we will use the plural.
When we leafed through the book, the title The War on Math caught our eye. Mathematics is one of our passions and we assumed the chapter was about education. But this chapter is really about America’s Fiscal Deficit and the opinions of the authors about its causes, symptoms and solutions.
In the interests of Intellectual honesty, we admit here to our own bias and personal beliefs. We are and
have been avid admirers of President Bill Clinton. He was the best
combination of Instinctive Intelligence and Analytical Intelligence we
have seen in any public figure of recent times. His record in managing
America’s economy is undeniably stellar. But our admiration does not prevent us from analyzing his economic record honestly.
Paint by Numbers – Section 2
Friedman & Mandelbaum begin by quoting Kenneth Rogoff, professor and author of the exceptional book This Time Is Different:
- Total American general government debt today is at a phenomenal level…By our benchmark, when you take local, state and federal government debt together we are at our all-time high..We are at the outer edge of the envelope of the last two hundred years of experience. ….and find that debt levels over 120 percent of GDP are quite exceptional.
So we expected a serious discussion of America’s fiscal situation. Instead, as we kept reading the chapter, the discussion got partisan and political. The authors write:
- It [the Debt] stood at $5.6 trillion in 2001, but over the next nine years it increased dramatically. By 2011, it had reached $14 trillion – the equivalent of the country’s GDP – with the prospect of increasing to $16 trillion without countervailing steps.
Every reader knows that 2001 was the inauguration of President George W. Bush and 2011 is today. The quote above seems to put the entire blame on President Bush 43. This is not just a suspicion. The discussion in the following sections does place the entire blame on Bush 43.
For the sake of completeness, let us add a major milestone between 2001 and 2011, a historical milestone that the authors ignore – the inauguration of President Obama in 2009. With this milestone, a few facts:
- The deficit in 2011 was $5.6 trillion in 2001 when Bush 43 took power. When he left power in 2008, the deficit was $10 trillion. So under Bush 43, the deficit increased by $4.4 trillion, an increase of almost 80% in 8 years, an increase of 10% per year. In the 2.75 years of the Obama Administration, the deficit increased by $4 trillion, an increase of 40% in 2.75 years, an increase of 14.5% per year. In other words, while Bush 43 took 8 years to increase the deficit by $4.4 trillion, Obama will increase the debt by $4 trillion in 3 years.
This is just simple Arithmetic. But the authors ignore it. And when they write about today’s deficit problem, they lay virtually all the blame on Bush 43.
Young Republicans – Section 4
This section begins with the sentence “Then came the administration of George W. Bush.” Then, comes the quote by Alan Blinder, a Princeton Economist and former vice chairman of the Federal Reserve:
- The nation took leave of its fiscal senses, and simply stopped paying for anything during President Bush 43’s eight years. Not for huge tax cuts – once again skewed towards the rich. Not for the Medicare drug benefit-which in fairness, is skewed toward the poor. Not for two wars. That spree was followed by the financial crisis, the Great Recession, and the policy responses thereto- all of which blew up the deficit massively under President Obama.
What a perfect quote for Friedman & Mandelbaum – Bush blew it and left the mess to the unfortunate Obama to clean it up. We shall return to this topic later.
Perhaps this quote was not enough. So the authors quote Mohamed El Erian of Pimco twice. The first El-Erian quote is about the 2008 economic crisis:
- “the responsible thing [for the policymakers] is to be irresponsible“.
Then after the deficit exploded from 2009 to 2011, the second quote by El Erian:
- “It is no longer responsible to be irresponsible.”
The authors follow the lesson they draw from these El Erian quotes – Obama was correct to explode the deficit in 2009 because it was the responsible thing to do and now that the deficit has mushroomed beyond control, we must be responsible going forward.
What were we before Bush 43 led us astray?
- The Clinton Administration’s economic policies were designed in part to generate budget surpluses that could pay down the deficit before the Baby Boomers retired and began to draw on Social Security and Medicare. As a result, from 1993 to 2001 America’s debt-to-GDP ratio went from 49% to 33%. Simply put, we cut our debt from half our annual output to a third. That used to be us.
Yes, that used to be us, Friedman & Mandelbaum. But how did we get to be what we used to be in 2001. We shall discuss that a bit later.
The next section Hey Big Spender discusses the explosion of Debt at the State and Local level.
The Return of Gravity – Final Section of Chapter 9
In this section, the authors give their prescriptions to end the war on Math. But first, they revert back to the theme of the first El Erian quote above.:
- In 2010, America was still reeling from the Great Recession and it was unrealistic to expect we would have the budget fight then that we need to have.
Translation, it was proper to spend massively in the early years of the Obama Administration and now it is time to take the medicine. The authors gloss over an inconvenient fact – 2010 was a recovery year. Early 2010 was the ideal time to begin a bipartisan discussion on cutting our debt.
In contrast, today America is entering a new recession according to Economists who correctly predicted the 2008 crisis, David Rosenberg of Gluskin Sheff, Lakshman Achuthan of ECRI and Gary Shilling just to name a few. This new recession might be harder to get out of because the Obama Administration has spent almost all of America’s bullets. The fiscal deficit has exploded to $14 trillion, the Fed has dropped the interest rates to zero. The Fed has implemented two versions of Quantitative Easings of about $1.2 trillion. None of these have worked.
Yet, the authors make greater Government spending the centerpiece of their guidelines for our future.
- It is not simply to reduce the deficit but to ensure prosperity. Solvency is vital but it is snot enough….Providing them [tools to people] will cost money and require new long-term investments. To assure the nation’s economic future we will have to spend more, not less, on some things…..Any one who says we can forgo spending of this kind does not understand either American history or the world in which we are now living.
We seriously doubt if the authors really understand the world we are living in. They quote from Ken Rogoff but they ignore the central message of Rogoff.
The biggest problem in the world is the gigantic overhang of Sovereign or Government debt. All engines of growth, America, Europe, China, are bloated and obese with unsustainable amounts of government debt.
Read the fresh words of Glenn Hutchins, a man who manages technology companies, companies that Tom Friedman loves to write about. Mr. Hutchins said the following on Friday, September 30:
- we are not in a cyclical set of problems. There were cyclical aspects to what happened in 2008. Those are largely behind us. Now we have a long term structural problem in our economy…..One is a decade-long period of low growth, punctuated by sovereign debt crisis as a result of accumulating the debt that you took on during the crisis itself to smooth out the problem.
In other words, the debt explosion from 2009 to 2011 to solve the 2008 crisis could be the cause of the next crisis. Glenn Hutchins then provides a vivid analogy:
- the analogy I use is people think we have had the flu. We are going to be sick for a couple of days and get right back. This is more like Diabetes and being 100 pounds overweight and having to manage your health for a decade before you might get healthy again.
This is the reality. Managing Diabetes requires Insulin and a diet, not more injections of sugar.
The authors quote liberally from David Stockman in this Chapter. What does David Stockman say now?
- We have done this [stimulus] 4 times in a row. We got some numbers this morning that say the economy is at stall speed. I don’t think it is working. I think in a debt saturated economy, which we have today, 50 trillion of debt on this economy public and private. When you stimulate, you are simply borrowing purchasing power from the future. It has no lasting effect. Stimulus goes through the economy like green grass through a hungry goose. It leaves nothing behind.And so therefore we are just digging ourselves deeper in debt pretending that we can do something to medicate the economy. I think it is a total mistake. Don’t they learn anything?
Mr. Stockman said the above on Friday, September 30.
The authors show respect to former Federal Reserve officials like Alan Blinder. We could not find any discussion in the Chapter about the mistakes of Alan Greenspan or Ben Bernanke. What does David Stockman say about the Federal Reserve?
- So the bond market is not real. It is not honest. It is totally manipulated by the Fed. And now we go into Operation Twist [the new stimulus program announced by Chairman Bernanke last week]….Twist is loney toons. It is off the deep end….This thing tells me that the monetary policy is even more broken than the fiscal policy.
There is very little discussion of monetary policy by Friedman & Mandelbaum in this Chapter. This is tragic because a serious case can be made that the Federal Reserve under Alan Greenspan and Ben Bernanke is far more responsible for America’s mess than either President Bush or President Clinton.
Discussion of monetary policy is hard and it doesn’t sell books. There is no money in telling the American people how easy money injected Bubblitis into American Society. No. it is much more profitable in today’s polarized America to blame President Bush 43 for destroying America’s fiscal balance.
We don’t mind political partisanship when it is honest. You know you are going to partisanship on Television. But you don’t expect partisanship bordering on intellectual dishonesty when you pick up a book by Tom Friedman.
The authors used the title phrase “That Used to be Us” when describing the economic policies of the Clinton Administration. They talk about the legacy of financial mess that President Bush 43 left behind for President Obama. But the Chapter does not spend even a nanosecond on the legacy President Clinton left for President Bush.
The Clinton Success and His Legacy to Bush 43
The authors use the narrative that President Obama was unfortunate in inheriting the legacy of the 2008 financial crisis & Great Recession from Bush 43 while Bush 43 was very fortunate to inherit the legacy of a booming economy and budget surplus from Clinton. This narrative serves to paint Bush 43 as a dumb, irresponsible spendthrift that spent the surplus and handed Obama a massive financial crisis and a great recession. Though we are Clinton admirers, we find this narrative intellectually dishonest. So let us set the record straight.
The recent story of the US economy is one of bubbles growing and bursting leaving the foundations of the economy weaker with each bust. Lest we forget, the US economy was first injected with Bubblitis in November 1998. The injector was Alan Greenspan, the Chairman of the US Federal Reserve.
The result was an explosive rise in the US stock market and a meteoric rise in the technology and telecom sector. After rising all year, the Nasdaq 100 index doubled in the fourth quarter of 1999. It was a great time to be in America. It was the beacon on the hill again. It was again the envy of the entire world. We know it now as the Tech Bubble. It should really be called the first Greenspan Bubble.
President Clinton did absolutely nothing to stop this bubble from growing. Perhaps, he enjoyed the great success of the Clinton economy, perhaps he was too preoccupied with the Monica Lewinsky scandal. It was the nadir of his popularity and he had little desire to take on the popular Alan Greenspan.
The wealth creation in that bubble was gigantic. And so were the tax receipts from capital gains taxes on the sales of sky high technology stocks. These humongous tax receipts did more to wipe out the fiscal deficits in 2000 than Clinton’s policies.
This huge corporate bubble burst in the second half of 2000. The massive bust in the corporate sector was Clinton’s legacy to Bush 43.
The Great Corporate Recession & The Great Consumer Recession
Few people talk about the Great Corporate Recession of 2000-2002. As a result of the good life of the technology bubble, America’s corporations became just as bloated in 2000 as American consumers became in 2008. When the corporate bubble burst and the great Corporate Recession ensued, America’s corporations were faced wit
h a massive deleveraging similar to what American consumers are going through today. This corporate deleveraging created America’s jobs problem that continues to this day.
Just as this corporate bubble was blowing up, 9/11 hit in September 2001. That doomed 2002 as well. Alan Greenspan responded by cutting interest rates all the way down to 1%. Nothing worked and the economy refused to recover.
Finally, the Bush Administration passed the tax cuts in 2003. They seem huge now but did not seem so in 2003. But the combination of tax cuts and lower rates did the magic and the US economy began recovering in the second quarter of 2003.
Alan Greenspan was deeply fearful of the US economy falling victim to the Japanese disease of deflation. So he injected the second round of Bubblitis in 2004. Instead of raising interest rates swiftly as he had done in 1994, Greenspan kept rates artificially low. As a result, he inflated the Housing Sector into a a massive bubble by 2006 just as he had done with the technology sector in 1999.
President
Bush did absolutely nothing to stop this bubble from growing.
Perhaps, he enjoyed the success of the Bush recovery, perhaps he
was too preoccupied with the Iraq mess. It was the nadir
of his popularity and he had little desire to take on the popular Alan
Greenspan. Then Alan Greenspan left and his protege Ben Bernanke proved even more committed to Bubblitis.
The result was a monstrous bubble in Housing and all forms of Credit. By the time, this bubble burst, American consumers had become bloated with debt. This crisis was more widespread because the consumer represents 70% of American economy. So this bust is bigger than the corporate bust in 2000.
The Presidencies of Clinton & Bush 43 are eerily similar. Both featured economic recoveries in the middle 4 years, Clinton from late 1994 – late 1998 and Bush from late 2002 to late 2006. Both Presidencies featured creation of huge bubbles in the penultimate year of their second term, 1999 & 2007. Neither President was responsible for creating the bubble. Neither President acted to persuade the Federal Reserve to end the bubble before it got too big. Both Presidencies featured massive busts of the bubbles in their final presidential year, Clinton in 2000 and Bush in 2008. Both left a legacy of economic mess to their successors.
But the reality is that Clinton did not do anything to address the corporate bust in his last year. In contrast, the Bush Administration solved much of the Banking crisis of 2008 before passing the baton to the Obama Administration. Secretary Henry Paulson did the country a great service by pushing TARP through Congress and by putting much needed capital in American Banks.
Contrast this fast and effective resolution with the trouble Europe has in fixing European Banks. President Bush to his great credit allowed Secretary Paulson freedom and political cover to take the steps necessary to fix America’s Banks.
This is the real story of the legacies of President Clinton and President Bush. Neither this reality nor the enormity of mistakes of Alan Greenspan or Ben Bernanke are found in Chapter 9 of the Friedman-Mandelbaum book.
This is not our definition of Intellectual Honesty.
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