Chapter 1: Origins and Influences
Before our rights are lost, we must work to change the policies of 70 years of government interventionism. And the longer we wait the harder it will be. – Ron Paul, Mises and Austrian Economics: A Personal View (1984)
On February 19, 2009, CNBC reporter Rick Santelli passionately criticized the idea of paying for his neighbors’ mortgages via a proposed government program called the Homeowners Affordability and Stability Plan live on the floor of the Chicago Mercantile Exchange. While they had little to do with taxes, Santelli’s on-air remarks fired up the group of traders working that day, leading him to exclaim, “We’re thinking of having a Chicago Tea Party in July! All you capitalists that want to show up to Lake Michigan, I’m going to start organizing!” To most Americans, what became known as “Santelli’s Rant” or “The Rant of the Year” has also come to be considered the beginning of the TEA Party movement.
Santelli’s diatribe, spoken as it was in the midst of the Great Recession, struck a chord with Americans who were taken aback by the developments of the previous two years. These remarks addressed a president in Barack Obama who, like his predecessor George W. Bush, was overly fond of taxpayer-funded solutions to private-sector problems. Even as Bush was considered a politically moderate-to-conservative Republican, his admission a few months earlier that, “I’ve abandoned free-market principles to save the free-market system” in order to bail out General Motors and Chrysler set the table for people to be angry about what they considered a meddling federal government exerting too much influence on the economy. The fact that it was the government – and not the overall economic market – that was dictating what businesses and industries were “too big to fail” rubbed a lot of people the wrong way. Through most of our nation’s history, spanning wars, economic panics, and depressions, there was no such thing as “too big to fail” in America until the 2008 financial market catastrophe. Fortunes had been made and lost for decades and the federal government stayed away. But not this time.
Months before Santelli spoke out, at a point when the 2008 presidential election was looming, the economy was in a state unseen in decades. Aside from a few bumps in the road, such as the mild recession in 1991 that then-candidate Bill Clinton falsely called the worst economy in the last 50 years, the slight hiccup thanks to the tech bubble bursting and worries about Y2k issues in the late 1990s, and even the uncertainty in the months following the 9/11 attack, the American economy had been more or less steadily prospering since the early 1980s. The Reagan tax cuts of 1981 and 1983 set the job market on a course where new employment peaked at over 1.1 million new jobs for the month of September, 1983, and overall employment increases of 300,000 or more per month were common during the Reagan years. Even the tax increase pushed through in 1993 by President Clinton didn’t fully derail the American economic train – although it was one factor in the Newt Gingrich-led Republican takeover of the House of Representatives in 1994 after an unprecedented four straight decades of party control in the grasp of Democrats. No longer would Republican leadership have to apologize from the actions of their more activist backbenchers because those activists were now the leadership.
While the Gingrich revolution was an earnest try at reining in the size and scope of government – and became the catalyst for a brief spell of years where the federal budget was considered in balance – by the turn of the millennium Republicans began proving they were just about as careless with taxpayer money as the Democrats were. So despite an economic boom fueled by post-9/11 wild speculation and rapid appreciation in the real estate market, aided by the Bush tax cuts in 2001 and 2003 that assisted in unemployment dropping under the 5% mark economists at the time considered “full employment,” the Jack Abramoff campaign finance scandal and a War on Terror gone sour allowed the Democrats to regain the majority of Congress in 2006 – just in time for the housing market to collapse.
When the housing bubble burst – as was bound to occur sooner or later – it took thousands of construction jobs with it. Eventually the trouble in that sector wormed its way through the economy through higher overall unemployment, while the collapse in the housing market pinched homeowners who had counted on the equity they had built up, thanks to continually rising home prices, to backstop the second and third mortgages and refinancing they had done as they wagered their home’s value would continue its upward climb and give them even more equity. As the economic house of cards built up by the false increase in home equity continued to implode, by December, 2007 America was officially declared to be in a recession.
Unlike the smaller bumps in the road we had managed to overcome in the previous quarter-century, this sharp downturn would come to be known as the Great Recession. As venerable financial institutions over-leveraged by easy credit and risky investments in mortgage-backed securities fell by the wayside, there was the palpable fear that this recession would usher in a replay of the 1930s. Panic in the financial markets led the federal government to take unprecedented steps to bail out private sector enterprises they deemed could not collapse, resulting in deficit spending that reached historic levels.
A large source of that spending came from earnest but misguided and basically unsuccessful attempts to avoid Great Depression 2.0. Beginning in 2008 Uncle Sam tried to goose the slowing economy with a number of Keynesian ideas as a means of “stimulus.”
One solution proposed by President George W. Bush came in the form of a direct payment to millions of Americans. In the spring of 2008 over $150 billion was sent out as an advance of the tax refund most Americans would eventually receive later that year. Not only did this stimulus package arouse the wrath of conservatives, the modest payments did little to assist those who were jobless and already behind on bills. And instead of spending the money to boost the economy by purchasing goods and services as the Bush administration had hoped, nearly half of those recipients surveyed used the advance simply as a means of catching up on overdue bills. It may have been great for bill collectors, but the guy laid off from the steel mill wasn’t getting the benefit of demand for his product.
Later that summer, as Wall Street and the American financial system in general were believed to be teetering on the precipice of collapse, the target changed. Rather than hand out a few hundred billion to the taxpayers, the Bush administration and Congress felt compelled to spend $700 billion on what became known as the Troubled Asset Relief Program, or TARP for short. This money was intended to purchase the mortgage-backed securities rendered all but worthless by the housing crash. (As it turned out, “only” $431 billion was dispersed before the program was deemed closed in 2014. Resale of the assets allowed the government to get away with a small net loss of $24 billion.)
For his part, Dick Armey, then head of FreedomWorks, believed that TARP fight was the real beginning of the TEA Party. Of course, it was all their doing, too:
In retrospect, September 29 (2008, the day of a failed House vote on the TARP bill) is clearly the day the Tea Party movement was reborn in America… There was a massive wave of spontaneous grassroots outrage that rose up against the government’s proposed actions, temporarily taking back the people’s house from the political elite. While FreedomWorks, our tiny coalition of like-minded organizations, and a handful of true blue legislators toiled away, surrounded on all sides by the Beltway establishment, the citizens of America – for a few days at least – took their country back.
Seeing the failure of that refund advance program and the unpopular bailout of Wall Street with the TARP program, incoming President Barack Obama campaigned and won the 2008 election by promising a broad agenda for “hope and change” that was aimed at Americans who were worried more about their economic security than the principles of liberty or disadvantages of increasing the size and scope of government. It was more than enough for an overwhelming electoral victory over Senator John McCain, the hapless Republican nominee who could not escape the unpopularity of President Bush and his ongoing wars in Iraq and Afghanistan, or the fatigue common with Americans grown restless after one party controls the White House for two terms. (In a tribute to his legacy, Ronald Reagan continues as the only President to escape that pattern in the postwar era, with his popularity even after two terms allowing Vice President George H.W. Bush to succeed him in the Oval Office.)
Days before he took office, President-elect Barack Obama warned Americans that, “I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years.” Obama’s attempt at fixing the economy was a much larger and broader package of federal spending than Bush proposed. The American Recovery and Reinvestment Act of 2009 (ARRA), which simply came to be called the “stimulus” bill, included a grab bag of tax cuts, direct payments to states, and some investment in infrastructure that as originally proposed would total $787 billion, with subsequent tinkering pushing the package past the $800 billion mark.
In his remarks proposing the bill, which came just as the incoming Congress was setting to work in early January, the President-elect said, “There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit on the short term.”
“It is true that we cannot depend on government alone to create jobs or long-term growth,” continued Obama, “but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe.” The Democratic-controlled Congress worked quickly to pass the ARRA and it was signed into law on February 17 – just two days before Santelli’s impromptu commentary.
Despite the belief from Washington that a mortgage assistance program filled the needs of thousands of Americans who were having difficulty with their mortgage payments, Santelli’s criticism of the latest in what had become a growing list of big-government solutions to private-sector problems echoed the concern of millions of Americans. Those nationally televised remarks, made as a spur-of-the-moment gut reaction to yet another likely Keynesian failure, were the same being made with less fanfare by all those who understood that a government big enough to provide for your every need was also the government that could take it all away in the blink of an eye. In their view, our nation was rapidly approaching the point where too many among us were becoming too dependent on government as the provider of their sustenance. That cross-section of skeptical Americans was the nucleus of what became known as the TEA Party.
But prior to the TARP battle joined by FreedomWorks, and before the Obama campaign and its promise of “fundamental change” for our republic began to gather much steam – and draw opposition from the forgotten men and women in middle America – there was already a liberty-based movement which reflected many of the principles that eventually guided the TEA Party, and its leader was a longtime critic of federal government influence and policies.
Ron Paul was first elected to Congress in a special election in 1976 to finish the unexpired term of a Gerald Ford federal appointee: an election he lost initially in a jungle primary but won five weeks later in a runoff. Paul served just six months, only to be ousted in seeking a full term in November, 1976 by his earlier special election opponent. (He lost by just 268 votes out of nearly 200,000 cast.) Undaunted, Ron avenged his defeat two years later, returning to the House fold for three terms beginning in 1979 – stepping away for an unsuccessful run for the U.S. Senate in 1984 – and came back for a third stint in 1997. In the second interregnum Paul ran for President as the Libertarian Party nominee in 1988.
One might consider Ron Paul more of a career politician than the Founding Fathers intended – although he balanced that with a long-standing practice as an obstetrician – but his advocacy for small government, an isolationist foreign policy, and a general reputation as a contrarian who was often among a small group of dissenters to otherwise popular feelgood legislation that, in his view, didn’t pass muster with the idea of limited, Constitutional government (for example, being the lone vote against a House resolution commemorating the 40th anniversary of the Civil Rights Act in 2004, claiming it “did not improve race relations or enhance freedom”) made him a hero to the pro-liberty movement.
With that in mind, Ron Paul formally announced a second run for the White House in March, 2007, but this time seeking the Republican nomination. His was a campaign driven by passionate people who were quick to support him financially but didn’t have the sufficient physical numbers to regularly boost his polling out of the single digits. Because Paul had such diehard supporters, his modest electoral success in the 2008 Presidential race came primarily from the states which held caucuses rather than primary elections.
However, when it came to raising money through small donations, Ron Paul was the undisputed champion in the 2008 primary season. Using an online presence with great success, he was one of the first national candidates to engage in a “moneybomb” strategy of fundraising, with an event timed for the birthday of the legendary English anti-government figure Guy Falkes on November 5, 2007 raising $4 million. (A stylized version of Falkes’ face is what you see on the masks worn by the “Anonymous” hacktivists and other protestors.) Based on that success, it was clear that another fundraiser would be a good idea.
That second “money bomb” eventually was set on another commemorative date: the anniversary of the Boston Tea Party on December 16. Naturally it was dubbed the Ron Paul Tea Party of 2007. It turned out to be a smashing success, eclipsing the single-day fundraising mark set by Paul with his first “moneybomb” a month earlier – as well as the more conventional fundraising effort by John Kerry the day after he won the Democratic nomination in 2004 – by taking in over $6 million. Yet Paul supporters also used the occasion to do their own re-creation of the Boston Tea Party, dropping symbolic tea chests into Boston Harbor and creating an event that featured several speakers. One of them was Ron’s son Rand, who would eventually be elected to the Senate from Kentucky two years later and make his own presidential bid in 2016.
Because of the Boston namesake event, many of Paul’s libertarian acolytes like to take credit for beginning the TEA Party – and they certainly can stake their claim. But to consider the origins of the TEA Party we also have to look at two separate but complementary ideas from the more distant past: first, the principles of life and liberty that led to the very founding of this nation and, secondly, the influence on the economic side of the equation derived from the Austrian School of economics and its disciples such as Milton Friedman and Ludwig von Mises.
The nation that became the wealthiest and most powerful among nations was born as a response to the tyranny of a distant king. Using the inspirations of ancient Greek and Roman democracy, the English Magna Carta and parliamentary system, and the belief that mankind was endowed by its Creator with certain inalienable rights, a small group of men steered the development of a nation unlike any other in the world at the time. And while the original Boston TEA Party would be considered a revolutionary act against the British Crown that occurred because a threepence tax on tea was placed on colonies unrepresented in Parliament, it occurred 16 months before the first shots of the actual American Revolution were fired a few miles away in Lexington.
Shortly after that initial skirmish, in July, 1775, the Continental Congress adopted the “Declaration of the Causes and Necessity for Taking Up Arms,” a treatise written by John Dickinson and Thomas Jefferson:
With hearts fortified with these animating Reflections, we most solemnly, before God and the World, declare, that, exerting the utmost Energy of those Powers, which our beneficent Creator hath graciously bestowed upon us, the Arms we have been compelled by our Enemies to assume, we will, in defiance of every Hazard, with unabating Firmness and Perseverence, employ for the preservation of our Liberties; being with one Mind resolved to die Freemen rather than to live Slaves.
But the resentment of the overbearing governance of the Crown that led to the American Revolution had built up over a number of years beforehand. For example, John Adams famously wrote on his objections to the Stamp Act in 1765, while Benjamin Franklin, after a brief moment of support early on, openly flouted the levy and testified against it to Parliament in February, 1766. Thomas Jefferson outlined a series of complaints as part of the outline of the rights of “British America” in 1774, while Thomas Paine published his pamphlet Common Sense a few months after the Revolution began in February, 1776. All desired to have the yoke of tyranny removed from the American colonies, but even after independence was won at the cost of nearly a decade of struggle with the British and their allies, there was still the fear that in our independence we had simply replaced one bad system of government with another based on the Articles of Confederation that served as our nation’s original rules of the road. Unlike the Constitution which would come later, the Articles provided for a fairly weak federal government run at the behest of the states.
Eventually this loose binding of the colonies had to be replaced, and over the course of the spring and summer of 1787 delegates from twelve of the thirteen colonies worked out our Constitution and the root of our present form of government. When some feared the new Constitution would result in an overly powerful federal government – despite the checks and balances written into the original document – it was amended with the familiar first ten amendments known as the Bill of Rights. These initial ten amendments came along a few years after the original was written, in 1791. (Two other proposed amendments did not make the cut of being ratified by a sufficient number of states, although one stipulating that Congress could not increase their salaries until an election had intervened was eventually ratified two centuries later as the 27th Amendment.)
We know that both our Declaration of Independence and Constitution have the inspiring language of all men being created equal with certain inalienable rights endowed by our Creator. But the TEA Party brought with it a long-overdue resurgence of interest in our founding documents, with one example being a pamphlet I acquired called the TEA Party Primer: it had the Declaration of Independence, Articles of Confederation, the Constitution, and a number of related documents including a discussion of the Constitutional convention in the summer of 1787. To read and study this particular tome would probably be the equal of a mid-level college course, yet it was a subject that suddenly piqued the interest of thousands of like-minded Americans during the first few years of the TEA Party.
Just as the original Tea Party focused on a levy the American colonists felt was unfair, the modern-day equivalent was based on TEA as an acronym for Taxed Enough Already. So we return to Ron Paul, whose idea of economic policy was based on the Austrian model that contrasted with the Keynesian school most prevalent in our government. Paul made news with his prediction of the housing bubble that created the Great Recession years before the fact, but even before that, in a pamphlet he wrote in the mid-1980s called Mises and Austrian Economics: A Personal View, Paul stated his reason for seeking a seat in Congress in the first place was to influence policy with the ideas of Austrian School economist Ludwig von Mises:
I decided to run for Congress because of the disaster of wage and price controls imposed by the Nixon administration in 1971. When the stock market responded euphorically to the imposition of these controls and the closing of the gold window, and the U.S. Chamber of Commerce and many other big business groups gave enthusiastic support, I decided that someone in politics had to condemn the controls, and offer the alternative that could explain the past and give hope for the future: the Austrian economists’ defense of the free market. At the time I was convinced, like Ludwig von Mises, that no one could succeed in politics without serving the special interests of some politically powerful pressure group.
Although I was eventually elected, in terms of a conventional political career with real Washington impact, he was absolutely right. I have not developed legislative influence with the leadership of the Congress or the administration. Monies are deliberately deleted from routine water works bills for my district because I do not condone the system, nor vote for any of the appropriations.
My influence, such as it is, comes only by educating others about the rightness of the free market.
While the more modern incarnation of this theory is neatly summarized in the bumper sticker slogan “Taxation is Theft,” the principles behind the Austrian School treat taxation as something that both retards the potential for economic growth and creates, in a never-ending contest of “can you top this?” an incentive for more creative ways for entrepreneurial individuals to avoid paying and for government to come up with new and different revenue schemes and streams. For example, despite all the heinous crimes reputed gangster Al Capone was accused of committing, the one which put him in prison was tax evasion.
To further buttress this point, a significant part of Austrian economics can be traced back to works relatively contemporary to the era of our nation’s birth: Adam Smith’s The Wealth of Nations was first published in 1776 while Jean-Baptiste Say’s A Treatise On Political Economy came out in 1803. It’s notable that our Constitution originally had a prohibition on direct taxation that was eliminated by the Sixteenth Amendment; thus, our nation spent most of its first 150 years using other means of sustenance. Implementation of income taxes were attempted at various points within that time frame, but they did not become Constitutionally valid until 1913 when the Sixteenth Amendment was ratified.
In the ensuing decades after its passage, the income tax moved from a toll on the exceedingly wealthy of the time to a headache average Americans have to endure every spring. As the government’s appetite for revenue increased, the earnings of more and more Americans were ensnared by Uncle Sam at increasing rates. Not only that, beginning in 1943, the midst of World War II, the government re-instituted backup withholding as a permanent way to make sure it was paid first, before you could take home a dime of your check. If you were fortunate enough, you could get all you paid in at the time you filed your taxes – but don’t expect interest on the loan you gave the government!
Was it any wonder people were frustrated with the situation?
It wasn’t until Ronald Reagan came to office that we at least began the downward trend in income tax rates that has held for the last three decades; arguably the Reagan-era supply-siders were just borrowing a facet of Austrian economics to make their case about lower tax rates increasing economic growth. Yet the taxation problem wasn’t necessarily confined to the federal government because state and local levies were on the rise; meanwhile, the Keynesian solutions applied to the Great Recession meant even more deficit spending, which in turn raised the prospect of the federal government either taxing us overtly through higher rates, changes in tax brackets, or elimination of so-called “loopholes” (such as consecutive presidents Reagan, Bush 41, and Clinton did) or taxing us covertly by inflating its way out of debt.
And as if the concern about the specter of perpetual deficit spending wasn’t enough, those most interested in the role our government played in their everyday lives worried that President Obama’s policy proposals and philosophy of government would lead us to a world not unlike the fictional characterization in Ayn Rand’s dystopian 1957 novel Atlas Shrugged, where entrepreneurs and producers were hounded by a government interested in fairness at the expense of innovation – just swap out Net Neutrality for the patent for Rearden metal and our energy industry for the railroads Dagny Taggart struggled to maintain and the novel’s premise can indeed be modernized.
Ayn Rand didn’t contemplate the exact alphabet soup of agencies that exerted greater and greater influence on state and local governments as well as private business, but the idea of The Strike (as her novel was originally called) was echoed by the reluctance of employers to expand to a staffing level that would put them in the crosshairs for Obamacare or by the disappointment of the worker who gets his annual COLA raise only to see it eaten up by a higher tax bracket and increased insurance costs. It seemed as if we had entered a time when no good deed went unpunished and government just didn’t care. Lamented writer and TEA Party organizer Michael Patrick Leahy:
The deliberative accountability of the seventeenth-century New England town meeting was nowhere to be found in modern America. In its place stood a cynical system in which elected political officials spoke words they didn’t believe to secure the votes of people they wouldn’t listen to after the polls closed, in order to maintain the power that benefited themselves and the special interest groups that gave them the funds to maintain their power.
With all these influences, factors, and concerns at work, the powder keg of frustration was set for the spark Rick Santelli created with his impromptu remarks on the Chicago Mercantile floor. But anxious Americans throughout the country and from many walks of life decided on their own they couldn’t wait until July to continue this movement – in fact, they already had their own gatherings in the works.