The Guardian - US Debt: The American economy in crisis

Right from the start Ronald Reagan stood for tax cuts and military spending. In his first term he may have made loud noises about paying off the deficit, starting with a budget including some tough spending cuts. His tax cuts would, he promised, be the stimulus the economy needed to really get going. But by 1985 the real effects of Reagans economic policy were becoming clearer.

By 1988, in the last months of his presidency, the Savings and Loans crisis added to the sense for some commentators of an economic policy that was proving catastrophically expensive. The cost of the up till then largest banking bailout in US history only added to the US national debt. By the end of Reagans presidency, the debt had tripled.

Ronald Reagan accepts the Republican presidential candidacy

Editorial, 19 July 1980

Ronald Reagan accepted the 1980 Republican presidential nomination, pledging to build a new consensus among those who share the values of family, work, neighbourhood, peace and freedom. Standing before the 1,996 delegates who had earlier nominated him by acclamation, Mr Reagan said, The time is now, my fellow Americans, to recapture our destiny, to take it into our own hands. Comparing his candidacy and the state of the nation at home and abroad to 1932, when Franklin Roosevelt was elected President, he said that Americans again had a rendezvous with destiny. Together let us make this a new beginning, he said. This convention has shown to all America a party united, with positive programmes for solving the nations problems, a party ready to build a new consensus with all of those across the land who share a community of values embodied in these words: family, work, neighbourhood, peace and freedom.

Mr Reagan spelled out his programme to rebuild the nation in traditional conservative rhetoric: stronger national defence, a tough stand against Soviet aggression, big cuts in Government spending and stepped-up production of coal and nuclear energy. He added one proposal usually initiated by liberal Democrats a major cut in taxes. He had harsh words for a Carter Administration characterised by weakness, indecision, mediocrity and incompetence. The Carter Administration lives in a world of make-believe, he said. Every day it dreams up a response to the days troubles, regardless of what happened yesterday and what will happen tomorrow. I condemn the Administrations make-believe, its self-deceit and, above all, its transparent hypocrisy.

Mr Reagan started with an appeal to Republican women: As President I will establish a liaison with the 50 governors to encourage them to eliminate wherever it exists discrimination against women, he said. He painted a gloomy picture of America after three-and-a-half years of Mr Carter. Never before in our history have Americans been called upon to face three grave threats to our very existence, any one of which could destroy us. We face a disintegrating economy, weakened defence and an energy policy based on the sharing of scarcity. I will not stand by and watch this great country destroy itself under a mediocre leadership that drifts from one crisis to the next, eroding our national will and purpose. Mr Reagan outlined his economic, military and foreign policy programme. I pledge to restore to the Federal Government the capacity to do the peoples work without dominating their lives, he said. Our Federal Government is overgrown and overweight. It is time for our Government to go on a diet.

He would impose an immediate and thorough freeze on Federal hiring and renewed his call for a 10 per cent tax cut in 1981 as the first step in a plan to cut taxes by 30 per cent. Americans must get to producing more energy, he said. Coal offers great potential. So does nuclear energy produced under rigorous safety standards. While calling for stronger defence, Mr Reagan said, First and foremost is the establishment of lasting world peace. But let our friends and those who may wish us ill take note: the United States has an obligation to its citizens and to the people of the world never to let those who would destroy freedom dictate the future course of human life on this planet.

Reagan budget could sink hope of lower dollar and rate cut

Alex Brummer, 5 February 1985

Hopes on Wall Street and among the USs big industrial partners that President Reagans 1986 budget would mark a watershed in Americas determination to tackle the looming deficits are dashed in the documents formally delivered to Capitol Hill today. After struggling mightily within the Cabinet for three months for a combination of public spending cuts which would reduce the budget deficit to about $100 billion, the White House has produced a package which, at best, would bring it to $144 billion by 1988 Mr Reagans last year in the White House. This probably means that the problem of high US interest rates and the strong dollar which has dogged the international economy in recent years will persist.

Indeed, in computing a deficit of $180 billion in the next financial year, dropping to $144 billion by 1988 and $82.4 billion by the end of the decade, the Administration has made a series of political and economic calculations which do not stand up to fine scrutiny. Its optimistic forecasting continues to verge on the ridiculous and as a political package the budget is unacceptable to Mr Reagans own party.

The budget assumes constant 4 per cent annual increases in the rate of growth from now until 1988 and, even then, only marginally lesser gains. Furthermore it predicts a downward curve for US interest rates even though increasingly higher yields are likely to be necessary to attract the vast amounts of savings required simply to service the burgeoning national debt. Among the most alarming of statistics contained in this years budget package are those showing the trend in debt interest payments. In 1986 they will account for 15 cents out of every dollar the US government spends, up from 13 cents in the current financial year. The rate of increase in percentage terms far outpaces even the controversial defence budget. In 1970, net interest payments represented 7.3 per cent of total government spending, or 1.5 per cent of the Gross National Product. By the end of President Reagans second term it will represent 15 per cent of spending and 3.4 per cent of the GNP.

Defence spending, which is normally seen as being the fastest-growing element in the budget, doesnt nearly match this, almost doubling in interest charges as a percentage of government and GNP. It has risen sharply since President Reagan took office and now accounts for around 30 cents of every dollar which the US government spends. But this is, in fact, less than in 1970, at the height of the Vietnam War. An important consequence of the USs fast national debt has been the rising volume of savings it is having to pull in from abroad to finance its official borrowing. New tables in this years budget show a startling trend in which US borrowing overseas shot up from 1.4 per cent in 1980 to 15.4 per cent in 1984. While this may be very pleasant for the US Treasury, in that it simplifies its funding operations, it has been the cause of all sorts of economic problems for the USs allies. By tempting foreign money into New York through high interest rates, the US has effectively diverted savings from domestic European and other markets to the US. Furthermore, as that money drawn to New York is translated into dollars it has damaged the currencies of the USs trading partners, forced up their domestic interest rates and had a detrimental impact on growth.

In fact the budget document notes with some pride that US efforts last year to make American markets more attractive to foreign investors worked. As a result of tax concessions and secrecy undertakings, it actually drew $12 billion in foreign savings in the latter part of 1984. It is argued that these foreign-targeted notes are being sold to reduce the US governments cost of borrowing. It is entirely possible that the Administrations need to draw in foreign investment to finance the deficit will become even greater in a second term. If, as many private sector economic forecasters are predicting, there is a pause or even a recession in late 1985 or in 1986, then the deficit projections will come badly unstuck. While a one per cent greater increase in the gross national product in the 1986 financial year would knock just $0.7 billion off the deficit, a one per cent loss in growth, which appears likely even on current economic information, would add $4 billion. By the 1987 financial year, the cost of a one per cent loss in gross national product would be $16.9 billion, soaring to $33.4 billion by 1988. In fact, it would not require a recession but simply a modest slowdown in the performance of the American economy to send the deficit numbers skyrocketing again, however deep the cuts made.