“Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.”
Many of the same people who complained about the above comment, made in late 2008 by President Barack Obama’s former chief of staff, Rahm Emmanuel, are following the strategy religiously.
The crisis in both cases was the U.S. recession and the economic lethargy that followed.
Emmanuel’s point had a basis in mainstream economic thought. Obama came into office in the worst recession since the Great Depression. Consumer demand had fallen sharply, leading to a malignant cycle. Retailers and manufacturers laid off workers because they could not sell their products. Increasing unemployment reduced demand even more, causing more layoffs.
The conventional response to this cycle, which has been used effectively by both parties when dealing with lesser recessions, is to restore demand through deficit spending. If the federal government makes up for the drop in consumer demand — either through direct spending or by transferring cash to people who will spend it — manufacturers will start hiring again, their employees will start spending again, and before long the malignant cycle will become virtuous. The deficit spending can end as the market gets back on track.
Emmanuel’s point was that as long as deficit spending was necessary, it may as well be spent in ways that advance specific policy goals.
Completely separate from the economics of the recession, some in America have long sought a minimalist government. For some it is a philosophical view that equates any growth in government with a loss of individual freedom. For others — including many with lots of money — it is more pragmatic. Government requires revenue, which comes more from those who make a lot of money than from those who don’t.
Government also plays a critical role in protecting society from harmful profiteering. Businesses prefer to operate without interference.
Advocates of a minimalist government face an obvious political problem in a democracy. The government they resent was designed by the people to protect the people. The taxes that support the government tend to benefit the majority at the expense of a wealthy minority. The self-interested inclination of the majority, therefore, would be to support a robust and responsive government.
It was a hard sell, but the minimalists had two advantages. One, they had a small but energetic movement, the tea party, which was philosophically opposed to many government functions. Two, and most important, they had money. Lots of it. The coupling of those who philosophically opposed government with those who just wanted to maximize profits created a potentially powerful movement.
The recession provided the crisis needed to expand the movement into mainstream politics.
Economic anxiety provides a fertile ground for political change, and beginning in 2008 there was plenty of anxiety. The public lost sight of the fact that deregulation was a primary cause of the recession and that safety nets were more important than ever.
The other advantage held by advocates of a downsized government was the federal debt.
Undisciplined spending by both parties had ballooned the debt since the last year of surplus, 2001. Recessions always increase the deficit and thus add to national debt. They do so because the reduction in economic activity reduces tax revenue and increases welfare costs. Deficits also increase because the most effective response to recessions — one used successfully by both parties since the Great Depression — is stimulus spending.
Former President George W. Bush and President Barack Obama pushed through some stimulus, but they underestimated the severity of the recession. The result was ideal for the political goals of the tea party and the tax-averse plutocrats who backed it. The deficit increased, both because of decreased revenue and a stimulus program that was only marginally effective. Two ongoing wars and a non-stimulative tax cut under Bush also increased the debt.
Suddenly, the anti-government crowd had a crisis it could sell to the general population. With cries of impending national bankruptcy, the two forces for minimal government combined to sweep the 2010 mid-term elections. Campaign funding was no problem, because political contributions were an investment for those whose primary goal was merely to reduce their tax bill and the costs associated with regulation.
The nation continues to suffer from the tea party response to the recession. While the specific policies Obama pushed may be subject to criticism, the important thing was that he was engaging in the deficit spending the economy needed. After January 2010, when Democrats lost a filibuster-proof majority in the Senate, Obama lost the ability to push through increased stimulus. The result is high unemployment and continued economic lethargy. Ironically, that means the private sector is unable to generate the revenue to significantly reduce the deficit.
Both sides tried to capitalize on a crisis. Obama’s approach would have eased the crisis. The tea party approach compounded it.