History matters. Without understanding how we reached our present economic and financial situation, it is hard for people to think sensibly about what needs to be done now.
Our current budget deficits are the result of 10 years of fiscal mismanagement, beginning with the tax cuts passed under President George W. Bush. At the time, there was this illusion of “extra” revenue that could be returned to taxpayers. In fact, the baby boomers were starting to retire in large numbers and that surplus was needed to cover their Social Security benefits. The facts, as presented, were wrong.
The facts were also wrong on the expense of two foreign wars in Iraq and Afghanistan. The Bush administration fired a senior official who predicted that the war in Iraq would cost considerably more than others were suggesting at the time. In retrospect, the wars will end up costing far more than even that official estimated.
There was also complete — bipartisan — delusion on the dangers posed by the financial sector. In this case, the most powerful people on Wall Street were the ones who had their facts wrong. Their mistakes blew up their companies in spectacular fashion and pushed the economy into a severe recession from which we are still, five years later, struggling to recover.
We need to strengthen our federal tax revenue base. We can do that by reducing or eliminating tax breaks that favor very rich financiers and limiting tax breaks that encourage overspending on healthcare. We need to stay out of war — and reduce the size of our military. We need to complete the process of financial reform that was started by the Dodd-Frank Act of 2010.
But we should go further. I support the SAFE Banking Act proposed by Senator Sherrod Brown. We should make our largest financial institutions small enough and simple enough so that they can, when appropriate, fail – just like any other American company. We should and must move to end “too big to fail.”
Simon Johnson spoke with Bill Moyers about JP Morgan’s multi-billion dollar loss in May. Johnson is a former chief economist of the International Monetary Fund and now a professor at MIT’s Sloan School of Management and senior fellow at the Peterson Institute for International Economics. His most recent book is White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.