Politics & Policy

Debt, Health Care, & Recession

It was bad government policies that got us into this mess. Better policies could get us out.

When Standard & Poor’s downgraded its credit outlook for the United States, former senator Phil Gramm (R., Tex.) was not surprised. Now an investment banker, Gramm regularly visits the central banks of China, South Korea, and Japan — the three largest holders of dollar-denominated assets in the world — and hears their complaints about their increasingly worrisome debtor. “The S&P is expressing in ratings what they’re expressing in terms of concern,” Gramm tells National Review Online: “Things cannot go on as they are.”

#ad#It’s a stark message. Another blunt point Gramm makes in his Texan drawl is that our current recovery is much weaker than the one that followed the 1982 recession. Echoing his recent op-ed in the Wall Street Journal, Gramm explains, “If we had recovered at the rate we recovered from the 1982 recession — and I remind you we had a little bit higher unemployment then than we had in this recession — we would have 15 million more jobs today and per-capita income in real terms would be $4,000 higher.”

Continuing the history lesson, Gramm, who was a professor of economics before he entered politics, argues that the only other recovery that was as lackluster as the present one was the recovery from the Great Depression. “There were some big recessions, like those in 1907 and 1920–21,” Gramm recounts. “They dwarfed the current recession, and yet the economy came back like a rocket. But in these two cases, the recovery lagged badly, and the government policies are quite similar, except for the fact that in the Depression we had very bad monetary policy. I think you could say monetary policy has been about as accommodating as it could be in this recession.”

Gramm argues that, contrary to what is commonly believed, President Roosevelt’s big-spending policies actually prolonged the Great Depression: “People forget that the other developed countries recovered from the Depression much more rapidly than we did. By 1938, industrial production was still down 20 percent in the U.S. from pre-Depression levels. It was up 20 percent in Great Britain.”

When I play devil’s advocate — that is, when I cite Paul Krugman — and argue that the economy lagged in 1937–38 because Roosevelt cut government spending then, Gramm responds, “Economists normally attribute it to the increase in reserve requirements by the Federal Reserve. But the wonderful thing about America is that everybody can have their own opinion.”

His own opinion, however, is that President Obama is as guilty of economic mismanagement as Roosevelt. “I personally believe that the policies of the Obama administration — the massive increases in spending, the tax increases, the expansive regulatory policies, the fact that the president clearly has a chip on his shoulder about business and successful people — I think those things have had an impact on business confidence,” Gramm reasons.

And if you’re wondering, Gramm lays little blame at the feet of Fed chairman Ben Bernanke: “Overall, he’s done a pretty good job.”

Rep. Paul Ryan (R., Wis.), on the other hand, has done an excellent job, Gramm believes. The former senator calls the congressman’s proposed budget “one of the most remarkable economic documents in the modern history of the country. The fact that it passed the House of Representatives shows that the American government in a crisis is capable of making hard decisions,” Gramm assures NRO, before adding, “or at least the House is.” And Ryan, he thinks, is a remarkable man: “He’s sincere, which I think is the highest praise you can have for a politician.”

Meanwhile, Gramm is less than impressed with President Obama, and he wonders why Obamacare’s promises to cut health-care costs are taken so seriously. “If I had proposed in the Reagan budget, or any other budget I worked on, Medicare reform where I claimed that we would save hundreds of billions of dollars by ‘bending the cost curve,’ people would have laughed in my face. Who doesn’t want to bend the cost curve? The question is, how do you do it?”

#pageGramm’s solution, like Ryan’s, is to put consumers in charge of their own health-care decisions. “In Obamacare,” he says, “it’s always some panel that is going to make decisions to save money — I guess through rationing — rather than changing incentives for people to be more cost-conscious. I want Americans to exercise more control over their own health-care costs. I don’t want some appointed or elected commission to make those decisions.”

#ad#He has some solutions for Social Security, Medicare, and Medicaid, too. For Social Security, set payments to rise with the price level — not wages — and raise the retirement age. For Medicare, increase the level of copayments and deductibles, especially for higher-income individuals, to make people more cost-conscious. “I would have a deductible of about $25,000 and a copayment of maybe 40 percent, so I would be pretty cost-conscious,” Gramm explains. “People not as blessed as I am would have lower copayments, but even the poorest people ought to pay something when they go to a doctor or get some test — just a dollar or a quarter, maybe, but something. People would change their behavior and it would save money.” He concludes, “I think letting states run Medicaid is the right thing to do.”

Politicians know what needs to be done to fix these problems, Gramm insists. The solutions are simple enough; they’re just hard to sell. They’re especially hard to sell when Democrats are telling the voters that Republicans want to rob their grandparents. Gramm’s response to this challenge is equally forceful: “Remember when they’re doing that that the average person over 65 is wealthier — not poorer — than the average citizen. And that we’re taxing young poor people to give benefits to older people who aren’t poor.”

This reminds Gramm of an experience he had when he was in the House of Representatives twenty years ago. The young Texan congressman had offered an amendment to index Medicare benefits by income, and Claude Pepper, a long-time Democratic congressman from Florida, rose to challenge the motion. “Doesn’t Congressman Gramm understand that these are old people?” the old bull asked.

“And doesn’t Congressman Pepper understand that they’re old but they’re not poor?” Gramm asked in reply.

After the exchange, Gramm’s mother called him in the cloakroom. “Why don’t you sit down and shut up?” she asked her political-risk-taking son. “But I was right and he was wrong, and he was dangerously wrong for the future of America,” Gramm says.

And Pepper’s vision, dangerously similar to Obama’s, is one we must avoid — now more than ever.

Brian Bolduc is a William F. Buckley Jr. Fellow at the National Review Institute.

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