The UniParty’s Malignant Fiscal Consensus—Bastard Spawn Of Bad Money

There can be no doubt whatsoever that the nation’s unfolding fiscal calamity has been enabled by the rogue central bank domiciled in the Eccles Building. By monetizing massive amounts of the public debt and driving inflation-adjusted interest rates to rock bottom lows, the Fed has fostered a malignant fiscal policy consensus in Washington that wouldn’t stand the light of day under a regime of sound money.

As a practical matter, this malignant consensus can be dated from the mid-1980s when the massive and wholly unnecessary Reagan defense build-up brought what remained of the Reagan Revolution to an abrupt halt. That is to say, domestic spending in real terms had been essentially frozen during the 1981 to 1984 Reagan budget-cutting offensive, but thereafter it was off to the races as usual.

Still, by Washington standards the Reagan freeze had marked a sharp reversal of the status quo ante. Thus, LBJ’s Great Society, Nixon’s domestic pork barrels and Jimmy Carter’s so-called pro-growth budgets had resulted in an explosion of domestic spending. In 2023 dollars of purchasing power, domestic non-interest outlays rose from $408 billion in 1962 to $1.535 trillion by 1980, representing a gain of 7.6% per annum.

During the first four years of the Reagan era, by contrast, inflation-adjusted domestic spending growth slowed to a crawl, rising to just $1.592 trillion by 1984 or by only 0.91% per year. But that’s about all she wrote in terms of shrinking—or at least freezing—the growth of the Welfare State.

By 1992, domestic spending in 2023 dollars of purchasing power was up to $2.10 trillion and then leapt to $3.1 trillion by 2008 and $5.8 trillion by FY 2024. Over the last forty-years, therefore, the Welfare State has grown by nearly 15X, exhibiting annual growth at a relentless 3.3% per annum rate in real terms, turning the small dent in the pace of advance that occurred during the first four Reagan budgets into a historical rounding error.

What happened, of course, is that the GOP rank and file on Capitol Hill grew weary of defending domestic spending cuts as the bloated Reagan defense budgets soared skyward. And then in 1987 America’s last sober central bank chairman was given his walking papers, which opened the door to Greenspanian monetization of the public debt and the death of even a semblance of fiscal discipline on either end of Pennsylvania avenue.

As it happened, national defense spending in 1961 totaled $500 billion in 2023 dollars of purchasing power. We have called that the Eisenhower Minimum because it reflected what the great American general and statesman believed was adequate for national security at the peak of the Cold War when he delivered his famous Farewell Address warning about the military-industrial complex. Lyndon Johnson, of course, vaingloriously and foolishly attempted to bring the blessings of the Great Society to Southeast Asia, raising the nation’s defense budget to nearly $700 billion of current purchasing power by 1968.