In most countries, to be “fiscally conservative” means toworry a great deal about the budget deficit and debt levels – and to push theseissues to the top of the policy agenda. In many eurozone countries today,“fiscal conservatives” are a powerful group, insisting on the need to boostgovernment revenue while bringing spending under control. In Great Britain,too, leading Conservatives have recently proved willing to raise taxes andattempted to limit future spending.
The United  States is very different in this respect.There, leading politicians who choose to call themselves “fiscal conservatives”– such as Paul Ryan, now the Republican Party’s presumptivevice-presidential nominee to run alongside presidential candidate Mitt Romneyin November’s election – care more about cutting taxes, regardless of theeffect on the federal deficit and total outstandingdebt. Why do US fiscal conservatives care so little about government debt,relative to their counterparts in other countries?
It has not always been this way. For example, in 1960,President Dwight D. Eisenhower’s advisers suggested that he should cut taxes inorder to pave the way for his vice president, Richard Nixon, to be elected tothe presidency. Eisenhower declined, partlybecause he did not particularly like or trust Nixon, but mostly because hethought it was important to hand over a more nearly balanced budget to hissuccessor.
The framework for US macroeconomic policy changeddramatically when the international monetary system broke down in 1971. The UScould no longer maintain a fixed exchange rate between the dollar and gold –the cornerstone of the postwar Bretton Woodssystem. The arrangement collapsed because the US did not want to tighten monetarypolicy and run more restrictive fiscal policy: keeping US voters happy wasunderstandably more important to President Nixon than maintaining a globalsystem of fixed exchange rates.
Ironically, however, rather than undermining thepredominant international role of the US dollar, the end of Bretton Woodsactually boosted its use around the world. Much has been written, and manyhands wrung, about the dollar’s decline overthe last four decades, but the fact remains that holdings of US dollar assetsby foreigners today are vastly greater than they were in 1971.
This turns out to be a mixed blessing, because it hasallowed the USto become less careful about its fiscal accounts. Foreigners now hold roughlyhalf of all USfederal government debt, and they are willing to hold it when it yields a verylow return in dollars (and even when the dollar depreciates).
In fact, whenever the world looks unstable, investors wantto hold more dollar assets – even when the US is the cause of the instability.When big US banks are in trouble or Americans are having another debilitating political fight over their publicfinances, global investors scramble into US Treasuries. Last year’scongressional showdown over the federal debt ceiling may have cost the US its AAAsovereign rating with Standard & Poor’s, but the federal government’sborrowing costs are actually lower now than they were then.
What has Americadone with this opportunity – arguably the lowest-cost funding in the history ofhumankind? Not much, in terms of productive investment, strengtheningeducation, or maintaining essential infrastructure. But the US has done agreat deal in terms of adopting tax cuts that boost consumption relative toincome and lower government revenue relative to expenditure. This is thelasting legacy of the “temporary” tax cuts adopted by George W. Bush’sadministration in the early 2000’s.
And Americans have shifted greatly toward politicalphilosophies – on the right and on the left – that regard public debt merely asa distraction. Or, as former vice presidentDick Cheney put it, “Reagan taught us that deficits do not matter” – meaningthat Ronald Reagan cut taxes, ran bigger deficits, and did not suffer anyadverse political consequences.
Ryan and members of the Tea Party wing of the RepublicanParty undoubtedly want to cut the size of the federal government, and they havearticulated plans to do this over several decades. But, in the near term, whatthey promise is primarily tax cuts: their entire practical program is front-loaded in that direction. The calculation isthat this will prove politically popular (probably true) while making it easierto implement spending cuts down the road (less obvious). The vulnerabilitycaused by higher public debt over the next few decades is simply ignored.
For example, Ryan supported George W. Bush’s spending spree. He also supports maintaining defensespending at or near its current level – resisting the cuts that were put inplace under the Budget Control Act of 2011.
The assumption here – unstatedand highly questionable – is that the US will be able to sell anunlimited amount of government debt at low interest rates for the foreseeablefuture. There is no other country in the world where fiscal conservatives wouldwant to be associated with such a high-stakes gamble.