Causes of The Deficit: Republicans Acting Responsibly

I am fortunate enough to have Ron Johnson, R-WI, as my US Senator. He is one of the freshman class aligned with the Tea Party movement. I have been tweeting Senator Johnson suggesting that he seriously consider raising the US Debt Ceiling. My basic argument is that the current deficit was causally related to actions taken during the Bush II administration. Being a Republican, Senator Johnson should be willing to take responsibility for these actions.

In the event that Senator Johnson would be interested in a more detailed explication of my causal argument, I've provided the following path diagram (click to enlarge) developed from Chapter 10 of the book This Time is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff.

Reinhart and Rogoff's own explanation is pretty straight forward (p. 172-173):

When a country experiences an adverse shock--due, say, to a sudden drop in productivity, war, or political or social upheaval--naturally banks suffer. The rate of loan default goes up dramatically. Banks become vulnerable to large losses of confidence and withdrawals, and the rates of bank failure rise. Bank failures, in turn, lead to a decrease in credit creation. Healthy banks cannot easily cover the loan portfolios of failed banks, because lending, especially, to small and medium-sized businesses, often involves specialized knowledge and relationships. Bank failures and loan pullbacks, in turn, deepen the recession, causing more loan defaults and bank failures, and so on.

Earlier in Chapter 10, Reinhart and Rogoff explain that recessions, bailouts and foreign wars (Iran, Afghanistan and the War on Terror) all lead to increases in the deficit. All these causes of increasing US debt are the direct result of actions taken during the Bush II administration, to include the lax attitude toward regulation of the financial sector that led to the Subprime mortgage crisis itself (the shock in the path diagram).

Notably missing from this causal explanation are entitlement programs, Obama care, public sector unions, high taxes (taxes were cut during the Bush II administration) and other right wing fixations. Senator Johnson will certainly see the sense of my air-tight causal argument. The rational policy response, which he will also certainly appreciate, would be to end foreign wars and the war on terror in addition to increased regulation of the financial sector. And, since the wealthy do not seem to know how to spend tax reductions on anything other than speculation, a tax increase on ill-gotten gains would also help reduce the deficit.

Technical Note: The upper part of the path diagram above is a positive feedback loop (negative signs multiplied together become positive as in basic algebra). The positive feedback effect explains why financial crises last so long and are so resistant to policy interventions.