Where Have All the Statesmen Gone?

Thomas Jefferson, Franklin Roosevelt, and Ronald Reagan have something in common that I’ll explain a little further down, but first, here’s a generalized question:

What do both parties in the transaction below have in common? 

Think for a minute, then click on the thumbnail below for the answer.

There’s an important Core Principle at play there; it’s one of the principles that many politicians, on both sides, have forgotten.  A letter by seven Republicans was my most recent reminder.  It was a letter in support of John Boehner for House Minority Leader, published in a Chicago Tribune article last Friday.  Here’s an excerpt:

We know the majority of the American people agree with our core principles. They share our commitment to the agenda that unites all Republicans: reform, fiscal responsibility, smaller government, and accountability ... [Americans] want to see Republicans acting like Republicans again.

I get nostalgic when I think back to the time when our Republicans on Capitol Hill acted like Republicans.  But I’m thinking a little further back than most people are—further back than the Contract With America in 1994, for sure.  I’m thinking back to a different time in the life of each Republican politician: the time in their lives before they turned into politicians. 

Republican pre-politicians
Before they became politicians, they were business employees, small-business entrepreneurs, sole proprietors, business managers, and young parents.  They were bankers and attorneys for business employees, for small-business entrepreneurs, for sole proprietors, business managers, and their families.  They were doctors, dentists, insurance agents, farmers, home builders, grocers, car dealers, pharmacists, barbers, landscape architects, retail store proprietors, and community leaders serving other business employees, small-business entrepreneurs, sole proprietors, business managers, and their families. 

They were a key to the private sector's success, the heartbeat of America, the engine of growth and prosperity.  Not all of them remembered what an ancient president, a Republican, had said one time way back in America’s past: “The business of America is business.”  Nevertheless, they were the ones making America work, just as that president had described.  They had a justifiable faith in their own individual futures; the sum total of all that, across all of the people making their own lives work, was a justifiable faith in America’s future. 

One of the core principles that just about everybody took for granted as they went about growing their careers, their businesses, and their standard of living was:

Faith-in-the future is justified when investments succeed in improving the future, and borrowing money for good investments is sound financial practice.

There are millions of examples backing up that Core Principle.  Many people decided that a new car would make their future better (getting to work, hauling the kids to soccer games, etc.); lenders agreed with them, so they borrowed-and-lent the money it took to get that new car.  Many decided the same thing about houses for their growing families, and lenders agreed with that, too—so they borrowed-and-lent mortgage money for those new houses.  Many decided they could make their future better by expanding their businesses (from one hot dog stand to two, one muffler repair shop to two, or one software product to two), and lenders agreed once again—so they borrowed-and-lent money to help fund those good investments.  It was sound financial practice; everybody knew that intuitively.  Borrowing money permitted the borrowers to obtain things immediately, things that started making their lives better immediately, things that would produce benefits that would more than cover the cost of borrowing the money that enabled those benefits to start accruing immediately.  Borrowed money was an effective, lucrative supplement to equity financing, and in most cases financially superior to the alternative of “100%-equity” financing.  Just about everybody, especially pre-politicians, knew it.

Yes, there was a measured risk in borrowing-and-lending.  Everybody knew that, too.  The risk was that both the borrower and lender turned out to be wrong, i.e., that the future failed to become sufficiently better as a result of the transaction.  Sometimes, an individual transaction failed so badly that the borrowers became unable to service their debt.  Most had scary stories about the ugly effects “too much debt” had on a friend, relative, or acquaintance.  Bankruptcy wasn’t pretty; as a result, everybody with any financial sense developed a healthy respect for, if not outright fear of, the word “debt.” 

Interestingly, however, almost nobody came to the conclusion that borrowing should stop—that car loans, mortgages, or business loans should be outlawed.  Everybody knew that a sufficient amount of new income would more than cover the cost of the borrowing it took to generate that new income.  Many Republican pre-politicians would use prudently-managed financial leverage successfully, making themselves and their lenders rich by growing their businesses.  Although some investments failed, far more of them succeeded.  Faith in the future was still a core value in America, because of its track record of success. 

Some entrepreneurs even made money writing best-selling books about how to get rich using “other people’s money”—that is, by borrowing.

Again, the Core Principle above is this: Borrowing money for good investments is sound financial practice.  It worked time and time again in the private sector, and the grand total of all those individual successes have added up to centuries of growing prosperity and living standards for America as a whole.  Why does the process of becoming a politician apparently banish that Core Principle from a person's memory?  I don't understand it, and cannot figure it out.

The trouble with politicians
Politicians know that most people have more important things to think about than politicians.  Politicians also know something else: they have no choice but to find a way to get people’s attention, in preparation for the next election.  And they also know at least two more important things: (1) fear is one of the best attention-getters of all; and (2) people fear the word “debt” because of all the negative anecdotal images it evokes about the friend, relative, or acquaintance who suffered the ugly consequences of “too much debt.”  Those negative anecdotes tend to overwhelm all the positive effects that millions of other car loans, mortgages, and business loans have had—positive effects that are easy to take for granted. 

“Debt” evokes fear, fear gets attention, attention gets politicians elected.  No wonder “debt” is a mainstay word in political speeches.  [I've often wondered what the reaction would be if we proposed outlawing borrowing—even against assets—to fund political campaigns.  Good for a few chuckles, I bet.] 

Three Statesmen who employed the Core Principle
Fortunately for our country, there were at least three statesmen (i.e., much more than just politicians) who held the presidency at supercritical junctures in our history.  These three statesmen understood in their hearts the Core Principle that “borrowing money for good investments is sound financial practice.”  That understanding, combined with their steadfast convictions, decisiveness, and political capital, arguably saved the country from extinction each time. 

Statesman #1: Thomas Jefferson

In 1803, a window of opportunity opened for a few weeks for our fledgling country.  Thomas Jefferson saw the opportunity, and acted decisively: he purchased the Louisiana Territory from France—in spite of loud criticism—even though the money to do it had to be borrowed from foreign lenders.  Although he had violated his own written opinion that government borrowing was so undesirable it should be made unconstitutional, he knew in his heart that borrowing money for such a good investment was sound financial practice.  The Louisiana Purchase turned out to be one of the best investments in history. 

Thomas Jefferson had faith in the future, and made the necessary decisions and investments to see it through.  The borrowed money it took to help fund that investment was worth every penny and more; the borrowers (US government) and the lenders (foreigners) had made a good deal.  Our country might not even exist today had it not been for Thomas Jefferson’s statesmanship.

Statesman #2: Franklin Roosevelt

In the 1930s, the country was stuck, its economy was not just stalled but shrinking, its people were losing faith in the government.  Roosevelt tried a lot of things to change that; many didn’t work, some did, some we’re still not sure about.  But the key was: he kept trying, and kept leading with confidence and faith in America’s future—in spite of loud criticism.  Although he never delivered on his promise to “balance the budget,” he knew in his heart that borrowing money for such a good investment was sound financial practice.  Whether I agree or disagree with this or that program of his, I am convinced that his leadership reunited the country, and arguably prevented a deteriorating sequence of events that could have ended in an overthrow of the government. 

Franklin Roosevelt had faith in the future, and made the necessary decisions and investments to see it through.  The borrowed money it took to help fund that investment was worth every penny and more; the borrowers (US government) and the lenders (our grandparents) had made a good deal.  Our country might not even exist today had it not been for Franklin Roosevelt’s statesmanship. 

Statesman #3: Ronald Reagan

In the early 1980s, the country was saddled with inflation, stagnation, the Cold War, and the threat of nuclear annihilation.  Reagan brought long-time convictions with him to the presidency, saw it as his duty to end those threats, and acted decisively—in spite of loud criticism.  Although he never delivered on his promise to “balance the budget,” he knew in his heart that borrowing money for such a good investment was sound financial practice.  His leadership reunited the country, won the Cold War, caused the downfall of the Soviet Union, and arguably prevented an all-out thermonuclear war. 

Ronald Reagan had faith in the future, and made the necessary decisions and investments to see it through.  The borrowed money it took to help fund that investment was worth every penny and more; the borrowers (US government) and the lenders (our parents) had made a good deal.  Our country might not even exist today had it not been for Ronald Reagan’s statesmanship. 

Statesmen versus politicians
Although statesmen must be good politicians, not all politicians are statesmen.  [Will I get the award for understatement of the year for that one?]  Today’s politicians play on our inherent, false phobia of the word “debt”; they milk it for every vote it’s worth.  Statesmen know there are priorities far more important than debt avoidance, and act accordingly.  Statesmen spend the money, borrowing what’s necessary, to grow the country, restore confidence in the government and the future, and prevent devastating wars—even if the benefits of their actions are not immediate and measurable, but spread instead over many generations.  Politicians, by contrast, “save money now” to “enhance today’s surplus” or “decrease today’s deficit”—even if “saving money” means leaving embassies unprotected from terrorist bombs, and our intelligence establishment less capable and integrated than it could have been.  Statesmen see far into the future, and know that good investments pay for themselves over and over again, for generations.  Politicians tend to be penny wise and pound foolish—or perhaps more accurately, present-wise and future-foolish. 

Some of my friends disagree with me
I have so-called conservative friends who talk as if a dollar of spending by government is equivalent to a dollar set on fire—implying that it’s nothing but waste—and the goal should therefore be to constrain “big government” because that constrains “government spending.” 

I have other, so-called liberal friends who talk as if every dollar of deficit is a dollar of extra, unmitigated burden on our grandchildren, and the goal should therefore be to constrain the deficit (and if possible get back to surpluses) by increasing tax rates. 

In other words, both sides talk as if borrowing is poison, and should be avoided by cutting spending, or increasing tax rates—depending on which side I’m talking to at the time.  It’s the same, tired old false dilemma we keep hearing from politicians (not statesmen) and their partisan, talking-head supporters—many of whom attempt to conceal their political argument by calling it “economics.”  It doesn’t fool me though, and I hope it doesn’t fool you either. 

The disastrous surplus
The “cut spending, curb big government” crowd was silent, and therefore presumably happy, about the 1990s cuts in national security spending that largely funded the politically-popular surpluses.  Their political opponents, the “raise tax rates, cash-in the peace dividend, growth-just-happens” crowd was similarly silent, and presumably gleeful, about those same cuts.  Both crowds still don’t seem to see the mistake we made by lowering our guard, because both crowds still talk wistfully about the surpluses of days gone by.  Both crowds in the 1990s put a higher priority on “the money” than on “what we get for the money,” and both crowds have forgotten what happened in the wake of that misplaced priority.

Neither crowd remembers the Core Principle that borrowing money for good investments is sound financial practice.  Both crowds think “fiscal responsibility” is measured by dollars of deficit or surplus.  Neither crowd remembers that the private sector grows wealthier by making good investments, and that the extra wealth more than covers the interest on the borrowing it took to fund the growth investments.  At least one crowd, if not both, seems to take growth in the nation’s economic strength for granted (“growth just happens”).  Neither crowd remembers that private sector businesses measure financial soundness by using “coverage ratios” (e.g., times-interest-earned, debt-to-assets, debt-to-income); neither crowd seems to understand that equally-informative coverage ratios are available for measuring our federal government’s performance (and change in performance) regarding “fiscal responsibility.” Two of those measures are the ratio of debt to GDP (65% today, far lower than its historical peak), and the ratio of net interest to taxes received (10% today, six points lower than a decade ago).  Those financial stats are better now than they’ve been in the past—but both sides are talking as if financial doomsday is almost upon us, and neither side admits publicly that one way to improve both ratios is an economy with more robust growth.  Does neither side have any ideas for growth-enhancing policies?  I don't believe that.  I think the cut-spending crowd fears admitting publicly that debt isn't necessarily bad, and can in fact be beneficial.  And I think the raise-taxes crowd fears being forced either to explain to the public why higher taxes are growth-friendly, or to shut up about tax increases.   

The “cut spending, curb big government” crowd has forgotten the Core Principle its private sector entrepreneurs and bankers have demonstrated time and again: prudently-managed leverage helps create new wealth faster.  But their political opponents, the “raise taxes, growth-just-happens” crowd has also forgotten a Core Principle at least two of its post-Keynesian economists, one a Nobel laureate, tried to tell everybody: a steady, prudently-managed ratio of debt to GDP is perfectly acceptable—therefore there’s certainly no need to set an explicit goal of decreasing it from its current level, let alone taking it all the way to zero.   

Core Principles have fallen by the wayside on both the right and the left.  On the right we have the “cut spending, curb big government” crowd—the group I think of as “Conservatives Against Finance.”  On the left we have the “raise taxes, growth-just-happens” crowd—the group I think of as “Progressives Against Progress.”  The Core Principles lay in the gutter, with nobody paying attention to them.  I guess the political fray must be too time-consuming for the politicians to notice those Core Principles just lying there, unnoticed.

Frankly, my optimistic nature is being severely challenged by today's politicians.  The Democrats—Progressives Against Progress—rationalize incessantly about raising tax rates, as if growth just happens.  The Republicans—Conservatives Against Finance—talk incessantly about cutting spending and smaller government, as if every dollar spent is a dollar burned (...and I fear they just might get what they're asking for, as they did in the 1990s). 

If you and I don’t find a way to revive the Core Principles that fell by the wayside, I will have to revise downward my optimism for our grandkids’ future.  Yes, I’ll have to revise it dramatically downward.   

Conclusion
We desperately need another statesman—but, sadly, all I can hear are politicians. 

I, for one, find myself missing Statesman #3 more and more as time goes on.   We certainly were fortunate to have him in the right place at the right time—moreso than many of us imagine. 


======

End notes:

(1) Abe Lincoln belongs on the list of statesmen, too.  He kept the country from splitting apart, and a lot of money was borrowed for that as well.  It was a necessary "investment" in correcting a wrong and in preserving the union. 

(2) I pledge to revise this article as necessary—as soon as the word "statespersons" appears in the dictionary. 

Comments

[Bob]

I read a lot of blog commentary. Probably too much. This entry is more than worthy of publication in a major periodical or newspaper. I'm thinking WSJ, U.S. News and World Report....along those lines.

I'd also like to see an O'Reilly, Limbaugh or even (heaven forbid) Savage pick this up. I'm going to send a bunch of emails. Maybe some other readers here could do the same.

Yes, Steve, we need a Gipper again. I'm reminded of the song from All In The Family which I'd alter a bit.....

"Mister we could use a man like Ronald Reagan again".

[Bret]

Steve wrote: "Both of them have faith in the borrower's future."

Sometimes. But quite often the loan is coupled with a lien on real assets whose value substantially exceeds the amount of the loan. In such case, the lender needs to have some faith in the future of the assets, but needn't have any faith in the future of that particular borrower. If the borrower defaults, the lender takes over the asset(s), sells them, and is once again whole.

But, ignoring that detail, the faith in the future premise may have other flaws. The fact remains that borrowers, big and small, occasionally do default, even though their future at the time of the loan looked incredibly bright. It's one thing if private entities end up in untenable financial straits, it would be quite another if the United States government, which is basically the world's bank, ended up in a weak financial position. The markets can absorb defaults on loans by private entities without even blinking. Can the markets absorb financial difficulties encountered by the largest government in the world if that ever happened? Probably, but at what cost?

[Mike]

We really really need to get the word out somehow, and have it stick. I mean, there's all those lobbyists out there shaping out politicians, I find it hard to believe we can't get through to a couple. If someone could sit down and explain this stuff to them for a couple hours, it would be a good start. I'm with you Steve, I'm afraid what might happen in the near future. I am optimistic as well, since everything has worked out for us so far, but it almost seems a guarantee they won't be near as good as they could be. These facts have to make it to the mainstream... they just have to. I’m only 24 so I’m going to see a lot of the long-term effects of what’s happening now.

[Bob]

I'm afraid that Bret is missing the whole point of this post and most likely failed to read Steve's post on hyperinflation.

I don't want to put words where they should not be but what this meant to me is that the overall level of angst and pessimism in this country does not bode well for faith in the future. Throw in the professional politician and it it is hard not to be grim. But there are any number of things we can do to make it brighter. My number 1 is alternative transporation fuel which Steve has written about.

That stated, it will require a statesman like a Reagan to make it
happen. Pray that one comes around sooner rather than later.

[Jon Thompson]

Mr. Conover. I've been a long-time reader of your blog, and I appreciate your view, and almost completely agree with it on every issue you've given voice. However, over the last few months, as a student of economics, I've come across some information which has drastically changed my mind on the central point of your blog, namely, the danger posed to America by running large and repeated deficits.

A study of both economic history and theory suggests no reason why debt itself (while reasonable, and that is defined, as far as I can see, by historic levels, so we are in a safe range now) should be dangerous. However, both theory and history show us that tax cuts increase government spending. In theory, we say that if a cost for a service has dropped, demand has increased. In history, every major tax cut of the post-war era has led to more government spending, and every tax increase has led to less.

Because I believe that government can be too big (and probably already is), the idea of a continually growing demand for government is disturbing.

If we run a deficit over a long period, I believe the trend is to continue to grow that deficit by increasing spending even more rapidly than growth raises revenue (or at the same rate), which is not, itself, a worrisome trait.

However, the fact is that I believe that government as a percentage of GDP is already too high, and this suggests no way to alleviate this problem, while tax increases and even small surpluses would drive down the size of government rapidly. Over the short run, this might hurt the economy, but over the long run, the resources freed from inefficient government uses would offset the sharp one-time losses.

Perhaps, of course, a reasonable deficit will produce only a constant government spending as a precentage of GDP, and this might be where we are, and we might find that the current level of spending is just right. If so, all that I've really shown is that you have little or no reason to worry about the danger of the budget naturally inching its way up to a surplus.

Your thoughts are appreciated.

[Jon Thompson]

On the subject of the danger of the debt itself, I have a story to relate.

My father worked for the state of California when Reagan was governor. He was some study board or other, and he was presented with a protest by a group of environmentalists on the danger of building a new nuclear power plant close to a fault line.

It turns out that the environmentalists, in this case, were not all lying, completely. In the case of the right earthquake and weather, a nuclear power plant situated so close to a fault line could be responsible for the death of five-thousand or so people.

Of course, the earthquake, to crack the reactor open, would have to be so massive it would kill literally millions of people.

This is very similar to worrying about America defaulting on her loans. It is possible, but in the world in which it could happen, much, much worse things would be going on. Realize that the Great Depression wasn't close to bad enough to make us consider failing to pay our debts. Short of nuclear holocaust, only structural deficits (deficits minus GDP growth) sustained for decades, and debt-to-GDP ratios of well over 100% could result in America failing to pay her debts.

[Steve]

to Jon Thompson:

I'd like to take a look at the data you mentioned. Although correlation does not guarantee causation, it's interesting if a decrease in taxes as a share of GDP correlates with an increase in the spending share.

In any case, the phrase "big government" isn't specific enough for me. When we cut national security spending in the 90s, cashing in the so-called peace dividend, government got "smaller." However, it would have been better for "government"(i.e., national security) to have kept the same funding, or even to have grown as a %gdp, if that would have prevented 911 or the subsequent costly wars.

[embutler]

FDR ...stateman??
the man who took the poeples gold (at gun point) and imm depreciated the currency from 20 bucks for an ounce of gold to 35 bucks... that stateman??
is the next paragon of national acclaim to be the one who takes your real estate and rents it back to you??

[Bob]

Embutler,

Read Steve's comments on FDR again. He didn't say he agreed with everything he did nor did he state that everything worked. But what he did do was give a disparaged nation hope. He acted and had faith that the country would come out of it's current state and become more prosperous.

Man, the term "dismal science" is so right on.

[Dave G]

I know you love Reagan, but isn't he guilty of your greatest political-economic sin? He used Carter's record debt as a selling point during the '80 election, even though GDP-Debt ratio was at a post WW2 low point.

Reagan later went on to balloon that ratio with outrageous spending on the military- industrial complex. Honestly, the 'value' of such an investment for America's future was debatable, being that the old adage about the USSR of "paint over rust" appeared to be correct.

Anyway, my opinions aside, I am a big fan of your writing.

[Dan]

I also believe we have a great need for another statesman. I'm wondering, Steve, if you have an opinion on any Republican candidates that have such potential? Slim pickin's, I agree.

Fred Thompson seems like a possibility. He does seem to say "pro growth" things...I guess we'll see.

[hiddentreasure.ws]

RON PAUL is THE ONLY CANDIDATE that hasnt violated his oath of office and understands teh realhistory behind foriegn and economic policy!

www.hiddentreasure.ws

[hiddentreasure.ws]

If we discuss Reagonomics, lets not be irrational and exclude discussion of the Grace Commssion report.

www.hiddentreasure.ws

[Nick Vincent]

Ron Paul is the only candidate addressing these issues, I suggest everyone look at what the corporate media is doing to marginalise him, what are they afraid of? The truth, that they are controlled by the corpocracy.