The downgrade of America's sovereign debt rating represents a real victory for the small-state, anti-Washington, anti-Progressive Tea Party and the Washington think-tanks that feed them. The grim news for Progressives is that saving the FDR/JFK/LBJ state will now require a strong positive argument to be won: what is the ambitious national and international project that will bind those who have done so well from the decline of the old social contract since 1980 back into common cause? Without this, the small-state Republicans will win their revolution in Washington. Can the progressive argument be made even in the face of economic head-winds? It hasn't been done - or seriously needed - since 1932.
"Starve the beast" was the strategy that Newt Gingrich thought might bring Washington government down to the kind of size he and his free market, small government Republicans wanted to see. The idea was simple: Reagan had shown the popularity of a tax cutting Republican agenda; but while he talked big on a smaller Federal budget, he did not succeed in reducing Washington's size very much. At best, in the view of market mystics, he halted the trend of increasing budget sizes from Carter's excesses, but in no way mamanged to put Washington on the pre-Ne Deal path they crave. This led to "starve the beast": if you really want small central government above all, you pursue the tax cutting agenda, regardless of spending, until the state can no longer borrow. When the day of reckoning comes - when lenders really will not advance your state any more credit - the market mystics hope that of the options available - cut spending, raise taxes or default - the first will take the brunt of the adjustment.
So are Washington's recent debt antics simply Act IV of "starve the beast"? Certainly, the Gingrichites in Washington have been looking forward to crunch-time. The Cato Institute's version of modern political history "The struggle to limit government" (John Samples, 2010) concludes with the thought that "deficits raise questions about the quality of consent of the old regime ... " (For Cato, the "old regime" is the New Deal, Progressive state). The book goes on to describe with a tone of hopefulness the crisis of legitimacy that might usher the end of the welfarist "old regime" that it so wishes away:
A public financial crisis might lead to default or inflation. More likely, it might lead to efforts to constrain the borrowing ... Those efforts might lead to much higher taxes or much lower spending ... Much higer taxes would lower economic growth, thereby raising more questions about the competence of the old regime in its central preoccupation ... Perhaps the unhappiness will be great enough to bring about the end of our old regime ... Do the American people still wish to live under a more limited government that offers more liberty if less of other goods? ... American voters have answered both "yes" and "no" to this question. The future may require an end to their ambivalence.In the Cato Institute's view of the world, the Progressive, New Deal state needs to deliver welfare and rising living standards for all in order to maintain its social contract. The small state Gingrichites claim not to care much about either, preferring "more liberty if less of other goods". Note that this is the small-state Republican party talking, not the state-corporatist Republicans of the Bush II era. The state corporatists under Rumsfeld and Paulson jumped in to rescue Chrysler, GM and Wall Street. Their legitimacy is shot. But the Gingrichites are still waiting for their victory.
In any case, the period from 1945 to approximately 1973 served the Progressive social contract well. Incomes of all increased substantially, as did public programs. There was not much not to like about the Progressive settlement and its direction - everyone was benefiting from growth and welfare.
But the 1970s brings that happy era to an end, and so begins an era of hope for small-state market mystics. Incomes stagnate for the least well off and rise rapidly for the best off - inequality rises sharply. At the same time, total public debt as a percentage of income stops falling. Wartime debt had climbed to about 120% of GDP and a combination of economic growth and social consensus had brought that down to around 22% by 1973. America was a country that could increase the prosperity of all, expand social programs, invest in infrastructure, conduct a Cold War all while living within its means - indeed, even paying down some of its inherited debt. It was all almost effortless. It was certainly, in some sense, ideologically effortless: the Progressive consensus delivered so well for so many that it hardly required an argument to support it. Welfare came costlessly. But the end of cheap energy in 1973 brought that era to an end. From 1970 to 1994, debt to GDP ratios increased. For the free marketeers, the Debt to GDP ratio becomes a key indicator fo the ideological struggle at the heart of Washington politics. Special interests, goes the theory, want all the benefits of collective resources but no one wants to pay for them. The natural political outcome is to borrow and to shift costs to future generations. Entitlements and the State-Industrial complex grow on the back of commitments made on behalf of citizens who are not yet voters who might complain. Public debt becomes a symbol of the dishonesty and irresponsibility that has come to dominate the Progressive settlement: everyone wants a piece of the benefits, but no one wants to pay for them. This, for Gingrichites, is the real "socialisation of costs" at the heart of modern political economy: costs are socialised by being imposed onto the yet-to-be-born.
Reagan and the Republicans try throughout the 1980s to allow executive control over spending. The line item veto is a fantasy of this period: the thought that the President might be given the power to strike down specific items in spending bills from Congress, rather than accepting or rejecting the whole bill negotiated between representatives and sent to the President for signing. The right also thinks that it might be able to pass a balanced budget amendment - senior southern Republican senators Gramm and Rudman devote their political energy to it - requiring increased spending to be matched by increased taxation before it can become law.
While these reforms remained largely at the level of fantasies for the right, the Repbulicans learnt two things: one that a low-tax program wins them elections and especially, two, if it is combined with no substantial changes in federal programs. The political success of the strategy is translated directly into persistent budget deficits. Tax rates fall for the rich and are stable for the lowest earners; GDP growth falls and public debt can only accelerate.
The debt to GDP ratio rises under Republicans since Reagan, falls under Clinton's economic miracle. But public debt to GDP rises dramatically again under Bush II - a new kind of "big state" Republican. Dick Cheney's verdict on the Reagan era is that "he taught the Republican party that deficits don't matter". This lesson in irresponsibility ushered in the big spend, low tax Republicanism of Bush II.
For the Republicans, "starve the beast" was an irresistible ideology: it won elections, oiled the wheels of pork-barrel Washington politics and the state-industrial complex, and was justified by the Gingrichite revolutionaries as being the way of making things so bad that they could only get better. Bush II's national, Christian Republicanism, which had no particular interest in a small state, could forge a tactical alliance with the Reaganite and Gingrichite republicans because at least Bush II was helping to starve the beast. He understood that tax cuts - especially for the rich - combined with big Washington spending - especially on the military industrial complex - continued Reagan's winning formula of cutting taxes and helpfully combined it with Gingrich's revolutionary attitude towards spending - the worse it gets, the better it is. If the Reaganite zeal for cutting spending was replaced with the Bush II zeal for spending on the war machine and on hitching the Churches onto the Washington gravy train, at least the beast was being starved. You no longer even needed Democrats spending on welfare to keep the beast hungry - spending on war could do just as well while lining the pockets of friends. The big and small government Republicans might not like each other, but they saw each other's usefulness. While it might have seemed obvious under Bush II that the Gingrichites were there simply to provide a legitimating ideology for Bush II corporatism, the financial crisis might actually make the small state Republicans the eventual winners.
The Clinton presidencies, dominated in public spending terms by the show-down between Clinton and Gingrich, sees a pause in starve-the-beast. Clinton demonstrates that there is no economic inexorability in the increase in debt to GDP ratios. Clinton does what is really most dangerous in the eyes of Washington-bashing Republicans: he runs a budget surplus without comprocmising welfare prgrams. He shows that the Progressive contract is still possible. Clinton is helped in this by the luck of the period: American GDP growth accelerates under the benign influences of peace dividend, the industrial maturation of the telecoms/micro-chip revolution and a return to cheap oil. All of this means that the Clinton miracle delivers the Progressive state just as in the good old days, and that includes with no ideological work. Redistribution and welfare hardly need to be argued for when everyone seems to be benefiting.
Obama's debt deal and Standard & Poor's downgrade of US sovereign debt mark the victorious return for starve the beast. The Obama deal to raise the debt limit promises small cuts to expenditure over the next 10 years: from the point of view of the market mystics, at worst this means that starve the beast is on course. But Standard & Poor's downgrade suggests that things are going even better than that for them: recognition that the beast may finally be suffering, not just dieting. The budget negotiations seem to have convinced the financial world that the Gingrichite revolutionaries are in with a chance to achieve their goal of "a more limited government that offers more liberty [with] less of other goods".
I sometimes feel that the financial markets may be right on this one: that the legitimacy of the Progressive state is irretrievably gone. One way of seeing the economic history of post-war public debt to GDP ratios is that a period of national unity and common purpose gave way to an era dominated by individual interests. An elite and relatively well-off middle class who were prepared to contribute to the Progressive State after the war and in the face of Cold War were not prepared pay for that state in the absence of serious external threat and with the waning of a sense of global responsibility. The Cuban missile crisis and 9/11 both gave a shot in the arm to the American sense of national purpose, and both of them led to a decade of militarily assertive foreign policy followed by debt, self-doubt and eventually a desire for the comforts of isolationist individualism.
This is the prosepct that the rating agencies are seeing: an America dominated by a desire to return to the innocence of the frontier; a willingness to smash the "old regime" built by FDR, JFK and LBJ, and a frustration with Washington's politics so great as to happily countenance a sovereign default if it finishes the beast off.
So if Standards & Poor are right, the Gingrichites are winning. But the counter-attack is unlikely to be as simple as to wait for another Clintonesque miracle. Clinton was helped by highly favourable winds, while supporters of the Progressive nation state today are facing powerful counter forces. There is little current prospect for an economic mini-miracle repeat of the 1990s. A technological break-through returning us to cheap and clean energy is a possible deus ex machina but can hardly be counted on. "Rebalancing" - growth from a catch-up in living standards by the emerging economies - will certainly continue to happen, but there is little prospect that this will be at a sufficient scale over the next 10 years to generate the kind of pain-free welfarism that the Progressive State benefited from between 1945-1973 and 1992-2000. It conceivably could - maybe a global Marshall aid program underwritten by China, Germany, Japan and the USA would do it - but, in the current state of global cooperation, that also seems an unlikely deus ex machina.
The survival of the Pogressive State over the coming decade will require what it has rarely needed: real persuasion. Taxes will need to rise in order to both solve long term debt issues and preserve government programs. But electorates will only accept this if a positive case can be made for the future that is being jointly built. At heart, the Gingrichite revolutionaries reject that common future: there is no common national or international purpose that they consider worth preserving. They want life to fall back on the family, the locality, the workplace and - if you must - the church. What they refuse - and what Standard and Poors thinks America might come to refuse - is an ambitious and large-scale common project that would gather enough support to legitimise a broad-based tax increase. This is what Progressives must work to create - without it, the Gingrichites have won.