That Used to Be Us_ How America Fell Behind in thted and How We Can Come Back - Friedman, Thomas L. & Mandelbaum, Michael [90]
We like the way Robert Bennett, the former businessman who served three terms as a Republican senator from Utah before losing the Republican nomination to a Tea Party candidate in 2010, explains it. “If you are asking the wrong questions, the answers don’t matter, and increasingly we are asking the wrong questions. There is really only one fundamental question: What is the borrowing power of the United States of America? When I took over the Franklin International Institute, to run it as a business, it had a debt of $75,000. When I stepped down as the CEO, it had a debt of $7.5 million. Well gee, I was a complete failure—except that they could not pay the debt of $75,000, and if the bank had called it, the company would have been shut down. And, when we had a debt of $7.5 million, we had over $8 million in cash in the bank; we had sales approaching $100 million and our pretax margin on those sales was 20 percent. So we were earning close to $20 million a year, and the only reason we didn’t pay off the debt is that it had some prepayment penalties. So we clearly had substantially more borrowing power than $7.5 million. So it’s the question of: What is the borrowing power of the United States? … Nobody can project it because the economy is constantly growing, constantly changing. But there is a feeling certainly in my gut and those of the economists whom I trust that we are approaching that limit. Now, once you go over that limit, wherever it is, you are Greece; you are Ireland; you are Zimbabwe. That’s the great issue: How do we make sure that the U.S. government does not approach that unknown number?”
That is indeed the great issue right now, and there is a growing consensus that we are approaching that unknown number. As we do, we should heed Rogoff’s advice: “When it comes to the question of how high is too high, nobody really knows. But complex arguments should not defeat common sense that you are taking a risk heading way further down this down road.” Or as El-Erian put it: “It is no longer responsible to be irresponsible.”
Common sense also says that the right strategy now is neither to slash all discretionary government spending suddenly nor to continue piling up debt to keep the economy stimulated, as if there are no implications for that down the road. The right strategy is to have a strategy—a strategy for long-term American growth and nation-building at home. That will require us to cut spending, to raise taxes, and to invest in the sources of our strength, all in a coordinated way.
But before we discuss that, let’s step back for a moment and ask: How in the world did we get into this position?
Present at the Creation
From the end of World War II until Ronald Reagan’s presidency, American budget history was pretty boring. The federal government ran manageable annual budget deficits and the economy steadily grew, so our debt-to-GDP ratio fell. Since the big change occurred during the Reagan presidency, we decided to ask someone who was present at the creation: David Stockman, the budget director during Reagan’s first term and a sharp critic of recent American fiscal policy. Stockman argues that the ground was prepared for the budget-busting that started in the 1980s by an event that occurred four full decades ago.
On August 15, 1971, the U.S. government put an end to the international