Federal Reserve Chairman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee on Captiol Hill February 24, 2009 in Washington, DC.
Will the "beast" slouch to the right or left?
Fed Chairman Ben Bernanke, who tends to speak in more complete, understandable sentences than the guy who had the job before him -- Alan Greenspan -- delivered a statement to the Congress this week on the impact of the nation's increasing debt-burden. "Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth," Bernanke warned.
The statement suggests that the nation's decades-long affair with spending beyond its means may have reached an end. In doing so, it may finally resolve who, ideologically is right about deficit spending.
During the '90s and early parts of this decade, conservatives candidly admitted that in addition to an economic reason for cutting taxes -- stimulating growth -- there was also a political one. Assuming that Congress wouldn't have the appetite for cutting spending commensurate with the cuts in taxes, annual deficits would grow -- and with them, the overall debt. Long-term, of course, such behavior was unsustainable. Nations can't keep turning on the red-ink tap. Eventually, it would have to come to an end. From the perspective of conservatives though, this is a good thing. Since lawmakers wouldn't shrink the government unless forced to, creating so much debt that the only option would be to cut spending would create the desired effect of the smaller government conservatives.
This strategy was called "starve the beast" -- the "beast" being the federal government.
Obama's spending proposals would effectively reverse that dynamic - they would create new spending commitments and run up large deficits, in the hopes that the dollars poured into health care and education will create a new baseline for government's obligations, which in turn will create the political space for tax increases on the middle class. Like the starve-the-beast approach, the Obama strategy puts off the hard part till tomorrow: Give them tax cuts today, conservatives said, and they'll swallow spending cuts tomorrow; give them universal health care, universal pre-K, subsidies for green industry and all the rest of it today, liberals seem to be thinking, and they'll be willing to pay for it tomorrow.
In other words, this is feed the beast. Add more and more social programs -- which have to be paid for: The deficits get so high that the public will accept increased taxes to pay for a larger government.
But has time already run out? The Thursday New York Times has what could be considered a very bleak outlook on the impact of accumulate debt and future interest rates. And that's well before the president has had his chance to create a health care reform plan. So, what direction will he go in -- attempt to fulfill a key campaign promise and trap future Congresses into agreeing to higher taxes to pay for the new social programs? Or will he admit he might be in the trap that the several generations of Republicans created -- opening up deficits that make it impossible for any liberal president to get his plans completed?
Will the beast be fed -- or has it already starved to death?