by Kit Conrad
Free Press Contributor
Was the massive increase in our national debt a deliberate program to redistribute wealth to the already wealthy? Whether or not that was the intent, that was the result.Let's start with a little history. When Jimmy Carter became President in 1977, he operated as a fiscal conservative. One of his goals was to balance the budget. Indeed, during his presidency, the annual deficits dropped each year. Until 1980, that is. His fiscal policies ran into the brick wall of unusually high inflation brought about by another oil shock and heavy commodity speculation, most notoriously by the Hunt brothers of Houston. In late 1979, Mr. Carter decided to kill inflation, and appointed Paul Volcker Chairman of the Federal Reserve to do the job.
Mr. Volcker raised interest rates through the roof by holding the money supply down. He, at least publicly, accepted Milton Friedman's academic and grossly simplistic notion that the growth of M2 (bank deposits and checking accounts) caused the inflation. Interest rates skyrocketed and the economy plunged into recession late in 1981. The recession caused tax revenues to decline and some expenses to increase. Hence, at the end of Mr. Carter's presidency, the deficit grew to Ford levels.
Ronald Reagan joined the parade in 1981. As the new president with a mandate, he convinced the Congressional leadership to pass the supply-side blueprint: The Economic Recovery Tax Act of 1981. This tax cut, specially designed for the highest-income earners, caused revenues to plummet. Everyone except a few extreme supply-siders knew the deficits would go ballistic, but they passed it anyway. (The Act also shifted the burden of taxation disproportionately onto the middle class and the nearly poor. This was later exacerbated by the tax "simplification" campaign and the increase in Social Security taxes throughout the 80's).
Accompanying the drop in revenues was Mr. Reagan's campaign to massively increase defense spending. To help contain the resulting deficits, he and Congress slashed domestic programs for the poor. Mental health facilities closed. Regulators stayed in their offices. Still the deficits ballooned.
The deficits were also fueled by the deregulation that began in the late 70's. Savings and Loan deregulation in particular encouraged the thrifts to invest depositors' money in speculative land developments. Some saw an opportunity to defraud. The resulting taxpayer-funded bailout added billions to the mounting debt.
The banking industry was also rescued in the 80's. The big money center banks loaned billions to Mexico, Brazil, Chile, Peru, etc. When those countries couldn't pay back their loans, our government bailed out the wealthy investors to keep the banks from failing.
In 1981, the national debt as accumulated from WW I through the Depression, WW II, the Korean War, the Space Race, the War on Poverty, the Vietnam War, and oil crises and recessions totaled a bit under one trillion dollars. By the time he left office eight years later, Mr. Reagan had tripled the national debt. The four years of Mr. Bush's presidency added another trillion dollars to the debt. What had taken liberals like FDR, Truman, JFK, and LBJ over half a century to build up, Mr. Reagan and Mr. Bush quadrupled in just 12 years. Mr. Clinton has also added to the total, but at a reduced pace.
Creditors Rake It In
How does the government borrow money? It issues paper called Treasury Bill and Bonds. Who buys these debt instruments? Certainly not the poor or most of the middle class.
Directly related to the size of the debt is the rate of interest paid to service it. The real rate on risk-free government bonds, over and above the rate of inflation, has historically been two percent. Over the last 15 years, the real rate has always been over 4 percent, and occasionally over 8 percent. Translation: taxpayers are being fleeced to pay off bondholders.
Let's review. The debt ballooned in the 80's because taxes were reduced on the very wealthy from a peak of 14 percent in the late 50's to 12 percent now, and corporate taxes declined even faster. The government bought massive quantities of weapons systems, enriching a few defense corporations and their investors. The government bailed out wealthy depositors in failing banks and S&L's. The government issued vast amounts of paper debt, selling it to the very wealthy on their terms. Do you notice a pattern?
Who pays the interest on the debt? Taxpayers, who are increasingly the middle class and the nearly poor. These changes have ignited a massive redistribution of income and wealth to the already wealthy. The top 1 percent of the population holds 43 percent of the wealth. America has the greatest disparities of income and wealth anywhere in the industrialized world.
The land of the free is taxing the huddled masses until it hurts, while continually finding ways to keep the rich from paying their share. Joe Citizen makes huge interest payments to the wealthy while also paying their taxes. Does this seem reasonable to you?
Kit Conrad is a Seattle-based commentator on economic issues.
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Contents this page were published in the May/June, 1998 edition of the Washington Free Press.
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