The Tea Party's modest proposal
August 13th, 2011
01:00 AM ET

The Tea Party's modest proposal

Editor's Note: Simon Johnson, a former chief economist of the IMF, is co-founder of a leading economics blog, The Baseline Scenario, a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics and co-author, with James Kwak, of 13 BankersFor more from Simon Johnson, visit Project Syndicate's website, or check it out on Facebook and Twitter.

By Simon Johnson, Project Syndicate

America’s Tea Party has a simple fiscal message: the United States is broke. This is factually incorrect – US government securities remain one of the safest investments in the world – but the claim serves the purpose of dramatizing the federal budget and creating a great deal of hysteria around America’s current debt levels. This then produces the fervent belief that government spending must be cut radically, and now.

There are legitimate fiscal issues that demand serious discussion, including how to control growth in health-care spending and how best to structure tax reform. But the Tea Party faction of the Republican Party cares more about small government than anything else: its members insist, above all, that federal tax revenue never be permitted to exceed 18% of GDP. Their historical antecedent is America’s anti-revenue Whiskey Rebellion in 1794, not the original anti-British, pro-representation Boston Tea Party in 1773.

Most importantly, their tactics have proven massively destructive of wealth in the US. Since the prolonged showdown over the budget began earlier this year, the stock market has lost about 20% of its value (roughly $10 trillion). In effect, the Tea Party is working hard to reduce publicly funded social benefits – including pensions and Medicare – even as its methods dramatically reduce the value of private wealth now and in the future.

Part of the Tea Party’s founding myth, of course, is that smaller government will lead to faster growth and greater prosperity for all. Never mind that the eye-popping growth projections in Representative Paul Ryan’s budget plan, for example, are utterly implausible; these projections matter politically, because, without them, the full sting of Ryan’s proposed Medicare cuts would be readily apparent.

Standard & Poor’s has received some justified criticism for the analysis behind its recent decision to downgrade US government debt; after all, there was little economic news that could explain the move’s timing. But S&P’s assessment of the political situation is on target: by creating a dysfunctional paralysis at the heart of government, the Tea Party has shown that it is willing to impose dramatic costs on the broader economy and to ensure significantly slower growth.

Confrontation and brinkmanship have become the new watchwords of American politics, even when the US government’s legal ability to pay its debts is on the line, owing to the Tea Party’s ideological rigidity. And the tone of political debate, not surprisingly, has become much nastier.

By signing a pledge not to raise taxes, Tea Party representatives have credibly committed themselves not to acquiesce in any middle-of-the-road compromise. If they break this pledge, presumably they will face defeat in the next round of Republican Party primaries. So, while a budget deal would technically be easy to achieve, it looks politically impossible in the near term. Indeed, while Congress and the Republican Party have become less popular during 2011, support for the Tea Party has remained remarkably constant, at around 30% of the population. Its tactics thus appear politically sustainable, at least through the 2012 elections.

Perhaps the most damaging outcome of these tactics is to take countercyclical fiscal policy off the table completely. Regardless of what happens to the global economy in the weeks and months ahead, it is inconceivable that any kind of meaningful fiscal stimulus would get through the House of Representatives.

It remains to be seen whether the US Federal Reserve will also feel constrained by the political mood on Capitol Hill. Clearly, influential Tea Party supporters would strongly resist any attempt now by Fed Chairman Ben Bernanke to find unorthodox ways to run a more expansionary monetary policy.

And, as for protecting the financial system against disaster, the current majority on the House Financial Services Committee is clear – they favor use of the bankruptcy system when megabanks get into serious trouble. If the eurozone crisis continues to spiral out of control, the US should expect to see Lehman or near-Lehman-type collapses among exposed financial institutions.

The irony of the Tea Party revolt, of course, is that it undermines the private sector more than it reins in “big government.” The S&P downgrade resulted in a “flight to quality,” meaning that investors bought US government debt – thus increasing its price and lowering the rate that the federal government pays to borrow.

It was the value of the stock market that fell sharply – which makes sense, given that counter-cyclical policy is now severely constrained. The government part of the credit system has been strengthened, relatively speaking, by developments over the past few months. It is the private sector – where investment and entrepreneurial activity are needed to generate growth and employment – that has taken a beating.

Unless and until America’s private sector recovers, investment and job creation will continue to stagnate. But today’s atmosphere of fear and aggressive budget tactics are combining to undermine private-sector confidence and spending power.

As Jonathan Swift put it in 1727, “Party is the madness of many, for the gain of the few.”

The views expressed in this article are solely those of Simon Johnson. Copyright: Project Syndicate, 2011.

soundoff (17 Responses)
  1. Cam Rankin

    Balanced Budget Amendment. It has to be done. I generally disagree with the Tea Party but they are right on here. US is not a socialism, it is capitalism. Bailing out billion dollar corporations and banks isn't a good idea either. Let free market reign, support/finance the military and get out of the way. It is time for these other "supposed world powers" to chip in and help out internationally. America lets fix ourselves, I would like to see the world get along without us for a few years while we are under repair. What would it be like with No USA for one month? God Bless the United States!

    August 13, 2011 at 2:27 am | Reply
  2. Onesmallvoice

    I just love the way these Tea Partiers claim that by increasing the unnecessary military spending, giving more tax breaks to the wealthy and cutting Social Security and Medicare and Medicaid will help balance the national budget. All these ideas are truly no-brainers. I may not be a rocket scientist but even I know better than that!!!

    August 13, 2011 at 3:50 am | Reply
  3. Phil

    Whereas the democrats will take from the rich to give to the poor with their redistribution of wealth mantra, The Tea Party seems to be making greedy corporations pay at the markets. Corporate America wants their cake and eat it too. Corporate America is the reason the nation falters on the edge of the abyss with their tax evasive strategies that have place our debt load so high. With their incompetance, greed and putting their profits in foreign shell company bank accoounts, they have created a backlash which will continue to put downward pressures on the markets.

    The IMF, UN and other U.S. funded organizations are just worried about losing their funding and want to blame the Tea Party like everyone else. In reality, the Tea Party is the democrats best friend and they don't even realize it.
    The U.S. is the economic engine of the world and it is running out of gas because of high unemployment. Without having people employed, tax revenue goes even lower, 401k's are no longer being funded and stock values will continue to decline especially as more jobs are exported to countries where they do not have to fund retirment plans or 401k's. When quality products are made in America again, then things will start to turn around.

    August 13, 2011 at 6:37 am | Reply
  4. Lene

    Because of the fact that Congressional Freshman Tea Party members will not even budge one iota....even when their leader Boehner is frustrated with them. Because of the fact they are a one note sector that will eventually destroy the GOP if they are not cut off as a poison, I consider the Tea Party as dangerous as any foreign terrorists. These people are greedy white people who just don't want to share, don't know how to share, and hate the fact that a biracial man is President. They are a cancer to their party (good) and their party is too stupid acknowledge that. The party follows them further and further to the Right. There is absolutely no place left on that ledge.

    August 13, 2011 at 8:16 am | Reply
  5. j. von hettlingen

    "As Jonathan Swift put it in 1727, “Party is the madness of many, for the gain of the few.”
    I see in President Obama the giant Gulliver, who put out the fire in the tiny kingdom Lilliput by urinating on it. as a metaphor for the deal in the Congress, for compromising in an unfortunate manner.

    August 13, 2011 at 9:27 am | Reply

    Fallen angels in prison and in jails. A new demonic black america has arisen from both the black hiphop and antebellum nation and is base on sterotypical images of low class and poverty strikcken as well as crimnally prone blacks and has replace the black human population in america who were wipout during the black holocaust during the years between 1968 20001 .I t was the rise of the hiphop culture which glorified black on black violence as well as the widespread use of racial profiling targeting black americans is what has contribute to black holocaust.

    August 13, 2011 at 3:01 pm | Reply
  7. helezleen

    I'm so impressed by this sacrifice that I have decided to do the same thing with my personal budget. I spend about $2000 a month on groceries, household expenses, medicine, utilities, etc, but it's time to get out the budget cutting ax, go line by line through my expenses, and cut back!

    August 14, 2011 at 1:56 am | Reply
  8. Susan in Texas

    Fareed, you are one of the most tuned and sharp minds I have listened to in many decades. PLEASE do this country a favor and research this frightening election that will take place soon. Rick Perry threw his hat in the pile yesterday. He is disliked by many Texans and has done nothing for the economy but sit as a pawn for the oil industry. The fracking that is taking place is ruining the environment and all Perry is doing is pushing the EPA aside so they can destroy the land. Perry is NOT a "safe" person and we all know what the last Texan did in the White House!!! Look into this..thanks

    August 14, 2011 at 6:57 am | Reply
  9. Brian

    The Dems are certainly not great, but what bothers me about the entire GOP field is a lack of substantive solutions. We have 16 months till the next election - What legislation exactly, will the GOP champion during that time, that will help the economy? My guess is they will obstruct, filibuster, and block anything that could possibly be construed as helping the economy – More Party above Country. Even though S&P said the Partisan bickering, along with the GOP's anti any Revenue stance, were the main reasons for the downgrade, it is good politics just to blame the other party for our debt, when in reality, both parties are culpable. The Tea Party are the Hooverites of the 21'st Century, and offer the same Fiscal Austerity card, Hoover used during the Great Depression, which caused Unemployment back then to soar from 9 to 25%. It is not Rocket Science - If Govt. is the Countries largest employer, (Which it is) and you cut Trillions from the budget it will result in massive unemployment, and reduced Revenue. It will in fact create a whirlpool effect of decreased GDP.All options were tried during the Depression. The only true solution to our debacle are: Lower Corporate taxes to 15% in line with the world's lowest, Repatriate offshored money without penalty, and Revise the tax code through a VAT, a Flat Tax, or National Sales Tax, with appropriate exemptions for the poor and elderly.End Income as a source of Revenue and we will end the two party stranglehold on Govt. A National Sales Tax would allow us to tax Imports without breaking Intl. agreements. The Tea Party will inadvertently create a New Great Depression through Austerity. This is the Unintended Consequence of Fiscal Austerity without fundamental tax Reform. We don't have just a spending problem ( IRS stats prove the Bush Tax cuts substantially lowered the Govt's Revenue from 18.5 to 14.9%) We have both a spending problem and a Revenue – to address one without the other will prolong, and deepen our malaise.

    August 14, 2011 at 6:52 pm | Reply
  10. GOPisGreedOverPeople

    GOP solution: Turn the Old, Sick, Poor, Unemployed, and Gay people into slaves. Then whip them until they are Young, Healthy, Rich, Employed, and Straight. Or until they are dead. Then turn them into Soylent Green to feed the military. A self sustaining GOP system.

    August 15, 2011 at 11:29 am | Reply

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