How did Barack Obama join Franklin Roosevelt and Ronald Reagan to become one of the three most transformative presidents in the past century? He was greatly aided by the financial crisis that erupted during the 2008 campaign. This gave the new president a mandate and a large Democratic congressional majority that fully embraced his progressive agenda.

Having learned from previous progressive failures, President Obama embarked on a strategy of minimizing controversial details that could doom his legislative efforts. But no factor was more decisive than his unshakable determination not to let Congress, the courts, the Constitution or a failed presidency—as America has traditionally defined it—stand in his way.

Americans have always found progressivism appealing in the abstract, but they have revolted when they saw the details. President Clinton’s very progressive agenda—to nationalize health care and use private pensions to promote social goals—was hardly controversial during the 1992 election. But once the debate turned to the details, Americans quickly understood that his health-care plan would take away their freedom. Even Mr. Clinton’s most reliable allies, the labor unions, rebelled when they understood that under his pension plan their pensions would serve “social goals” instead of maximizing their retirement benefits.

In its major legislative successes, the Obama administration routinely proposed not program details but simply the structure that would be used to determine program details in the future. Unlike the Clinton administration’s ill-fated HillaryCare, which contained a detailed plan to control costs through Regional Healthcare Purchasing Cooperatives and strictly enforced penalties, ObamaCare established an independent payment advisory board to deal with rising costs. The 2009 stimulus package was unencumbered by a projects list like the one provided by the Clinton administration, which doomed the 1993 Clinton stimulus with ice-skating warming huts in Connecticut and alpine slides in Puerto Rico.

The Obama stimulus offered “transparency” in reporting on the projects funded but only after the money had been spent. Similarly the 2010 Dodd-Frank financial law defined almost nothing, including the basis for designating “systemically important financial institutions” that would be subject to onerous regulation, what bank “stress tests” tested, what an acceptable “living will” for a financial institution looked like or what the “Volcker rule” required.

In addition to a filibuster-proof majority in the Senate, Mr. Obama benefited from unprecedented Democratic support in Congress. Congressional Quarterly reported that “Obama’s 98.7% Senate success score in 2009 was the highest ever,” surpassing LBJ’s 93%, Clinton’s 85% and Reagan’s 88%. Reagan’s budget, tax cuts, Social Security reform and tax reform programs all had significant bipartisan input and garnered the strong Democratic support they needed to become law. But ObamaCare had no bipartisan input and did not receive a single Republican vote in Congress. The Obama stimulus package received no Republican votes in the House and only three Republican votes in the Senate. Dodd-Frank received three Republican votes in the House and three in the Senate.

Voters used the first off-year election of the Obama presidency to express the same disapproval that they had expressed in the Clinton presidency. Democrats lost 54 House and eight Senate seats in 1994, and 63 House and six Senate seats in 2010.

Mr. Clinton reacted to the congressional defeat by “triangulating” to ultimately support a bipartisan budget and tax compromise that fostered broad-based prosperity and earned for him the distinction of being one of the most successful modern presidents. Mr. Obama never wavered. When the recovery continued to disappoint for six long years he never changed course. Mr. Clinton sacrificed his political agenda for the good of the country. Mr. Obama sacrificed the good of the country for his political agenda.

The Obama transformation was achieved by laws granting unparalleled discretionary power to the executive branch—but where the law gave no discretion Mr. Obama refused to abide by the law. Whether the law mandated action, such as income verification for ObamaCare, or inaction, such as immigration reform without congressional support, Mr. Obama willfully overrode the law. Stretching executive powers beyond their historic limits, he claimed the Federal Communications Commission had authority over the Internet and exerted Environmental Protection Agency control over power plants to reduce carbon emissions.

When Obama empowered himself to declare Congress in “recess” to make illegal appointments that the courts later ruled unconstitutional, he was undeterred. In an action that Lyndon Johnson or Richard Nixonwould have never undertaken, Mr. Obama pushed Senate Democratic Leader Harry Reid to “nuke” the rights of minority Senators to filibuster judicial nominees and executive appointments by changing the long-standing 60-vote supermajority needed for cloture to a simple majority.

American democracy has historically relied on three basic constraints: a shared commitment to the primacy of the constitutional process over any political agenda, the general necessity to achieve bipartisan support to make significant policy changes, and the natural desire of leaders to be popular by delivering peace and prosperity. Mr. Obama has transformed America by refusing to accept these constraints. The lock-step support of the Democrats’ supermajority in the 111th Congress freed him from having to compromise as other presidents, including Reagan and Mr. Clinton, have had to do.

While the Obama program has transformed America, no one is singing “Happy Days Are Here Again” or claiming it’s “morning in America.” Despite a doubling of the national debt and the most massive monetary expansion since the Civil War, America’s powerhouse economy has withered along with the rule of law.

The means by which Mr. Obama wrought his transformation imperil its ability to stand the test of time. All of his executive orders can be overturned by a new president. ObamaCare and Dodd-Frank can be largely circumvented using exactly the same discretionary powers Mr. Obama used to implement them in the first place. Republicans, who never supported his program, are now united in their commitment to repeal it.

Most important, the American people, who came to embrace the Roosevelt and Reagan transformations, have yet to buy into the Obama transformation. For all of these reasons it appears that the Obama legacy rests on a foundation of sand.

Mr. Gramm, a former Republican senator from Texas and chairman of the Senate Banking Committee, is a visiting scholar at the American Enterprise Institute.

A version of this article appeared May 22, 2013, on page A15 in the U.S. edition of The Wall Street Journal, with the headline: The Debt Problem Hasn’t Vanished.

By Phil Gramm and Steve McMillin

President Obama has raised the national debt by nearly $6.2 trillion, the equivalent of $78,385 per family of four. It is true that projected deficits recently have been reduced. April tax filings increased 28% from 2012, but much of this was thanks to a one-time rush at the end of 2012 to report income before rates rose in January. The second largest reduction in the deficit came from Fannie Mae taking a one-time accounting adjustment.

But unless the economy soars, or a significant budget agreement is reached, the most lasting legacy of the Obama presidency will be a $10 trillion increase in the national debt—a burden that bodes ill for the nation’s future.

Once the Federal Reserve’s easy-money policy comes to an end and interest rates return to their post-World War II norms, the cost of servicing this debt will explode. The cost will increase further as the Fed sells down its $1.85 trillion holding of government bonds, and the Social Security system runs deeper and deeper into the red. The Treasury will then have to pay interest on an ever-growing percentage of the debt.

Since the World War II era, the average maturity of outstanding federal debt has been about five years, and the average interest cost on a five-year Treasury note has been 5.9%. At this interest rate, the expected cost of the Obama debt burden will eventually approach some $590 billion per year in perpetuity, exceeding the current annual cost of any federal program except Social Security.

An America forever burdened by massive government debt would have been unthinkable for much of the nation’s history. Beginning with the Revolutionary War, the pattern has been that federal debt increased to help finance the nation’s armed conflicts. But government spending after the wars dropped and debt was paid down, or even paid off, as under President Andrew Jackson in 1835.

Federal borrowing during the Civil War reached nearly $2.8 billion, about 30% of GDP. Thereafter the government ran surpluses and redeemed U.S. bonds that served as the reserve base of national banks and literally burned U.S. paper currency—greenbacks—in the furnace of the Treasury building. The money supply fell and federal spending plummeted to $352 million in 1896 from $1.3 billion in 1865.

These are policies that horrify modern Keynesian economists. Yet over that late 19th-century period real GDP and employment doubled, average annual real earnings rose by over 60%, and wholesale prices fell by 75%, thanks to marked improvements in productivity.

With the onset of the Great Depression, the national debt increased dramatically for the first time in the peacetime history of America, reaching 43% of GDP in 1938. World War II meant more borrowing. Since 1930, there has been no concerted effort to pay down the national debt. Any reductions in the national debt relative to the GDP have been almost solely the result of economic growth and inflation.

As the debt burden rises, so too does the cost of servicing the debt increase as a share of the growth the economy is capable of generating. When the debt on which interest is paid equals the GDP level of a nation, the economy must grow faster than the interest rate to avoid debt-servicing costs consuming all the benefit of economic growth. A nation then begins to lose its ability to grow its way out of a mounting debt crisis. Its options start to narrow down to forced austerity, inflation or default.

Today the total U.S. federal debt is 103% of GDP. Since interest paid to the Fed, the Social Security system and other government pension funds is effectively rebated to the Treasury, taxpayers currently bear only the burden of interest on 60% of this debt. But the size of the debt and the percentage of the debt on which interest will have to be paid are rising.

Some seek solace in the fact that at the end of World War II, the national debt exceeded GDP and still the economy prospered. But when the war ended, federal spending dropped to $29.8 billion in 1948 from $92.7 billion in 1945. Spending as a percentage of GDP fell to 12% from 44%. The U.S. emerged from the war as the world’s dominant producer of goods and services. The demand for dollars around the world was insatiable, and a long period of record prosperity ensued. High GDP growth and inflation eventually brought down the debt-to-GDP ratio.

Americans today face a totally different situation. Spending and huge deficits continue unabated, and growth rates have declined since the recovery began four years ago. The reduction in government spending that occurred following World War II would be politically impossible today short of a cataclysmic crisis. Under Mr. Obama, the government has run trillion-dollar deficits for four consecutive years, and the top marginal tax rate today is already higher than it was when the budget was balanced in fiscal year 2001.

The president and many in Washington are complacent because, thanks to the Fed’s unprecedented near-zero interest rate policy, the burden of servicing the debt today is just 0.9% of GDP, the lowest level in over five decades. But this cannot last, and the Fed is already looking for an exit plan.

Sadly, nations generally discover the truth of Albert Einstein’s dictum that compound interest is the most powerful force in the universe—not through the happy accumulation of wealth but through the agonizing enslavement of debt.

Mr. Gramm, a former Republican senator from Texas, is senior partner of U.S. Policy Metrics, where Mr. McMillin, a former deputy director of the White House Office of Management and Budget, is a partner.

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Since mid-September of 2008, the Federal Reserve balance sheet has grown to $2,814 billion from $924 billion as it purchased massive amounts of U.S. Treasurys and mortgage backed securities. To finance those purchases the Fed increased currency and bank reserves (base money).

That kind of monetary expansion would normally be a harbinger of inflation. However, with banks holding excess reserves rather than lending them out—and with velocity (the rate at which money turns over generating national income) at a 50-year low and falling—the inflation rate has stayed close to the Fed’s 2% target.

While the Fed considered its previous rounds of easing—QE1, QE2 and Operation Twist—the argument was consistently made that the cost of such actions was low because inflation was nowhere on the horizon. The same argument is now being made as the central bank contemplates QE3 during the Federal Open Market Committee meetings on Wednesday and Thursday.

Inflation is not, however, the only cost of these unconventional monetary interventions. As investors try to predict the timing and effect of Fed policy on financial markets and the economy, monetary policy adds to the climate of economic uncertainty and stasis already caused by current fiscal policy. There will be even greater costs when the economy begins to grow and the Fed, to prevent inflation, has to reverse course and sell bonds and securities to the public.

Since September 2008, the Fed has acquired $1.16 trillion of government securities—in fiscal year 2011 (Oct. 1, 2010-Sept. 30, 2011), the central bank bought 77% of all the additional debt issued by the Treasury. Aside from the monetary impact of these debt purchases, the Fed allowed the federal government to borrow a trillion dollars without raising the external debt of the Treasury and without having to pay net interest on that portion of the debt, since the central bank rebated the interest payments to the Treasury.

When the Fed must, in Chairman Ben Bernanke’s words, begin “removing liquidity,” by selling bonds, the external debt of the federal government will rise and the Treasury will then have to pay interest on that debt to the public. Selling a trillion dollars of Treasury bonds on the market—at the same time the government is running trillion-dollar annual deficits—will drive up interest rates, crowd out private-sector borrowers and impede the recovery. Debt-service costs to the Treasury will spiral as every 1% increase in federal borrowing costs add $100 billion to the annual budget deficit.

In addition, Operation Twist, by shortening the average maturity date of externally held debt, will require the Treasury to borrow more money sooner when the economy recovers and interest rates start to rise. This too will drive up interest costs and the deficit.

The same problems will occur as the Fed begins to sell its holdings of mortgage-backed securities to reduce the monetary base. When the Fed bought these securities, it may have marginally reduced mortgage interest rates. Selling them during a real recovery will likely cause mortgage rates to rise.

Proponents of QE3 argue that while the Fed’s balance sheet must be reduced at some future time, it has the tools to minimize the impact on interest rates by slowing down the pace of the sales. But the Fed’s ability to act has already been compromised by its pledge to maintain low interest rates through 2014. Having to time open-market sales to minimize interest-rate increases will further limit the Fed’s ability to preserve price stability. In short, the Federal Reserve in future years will face significant constraints that are being forged now.

The Fed could raise the interest rate that it pays banks on reserves they hold in lieu of reducing its balance sheet. Where would the money come from? It has to come out of the money the Fed is currently paying the Treasury, driving up the federal budget deficit. How will taxpayers feel about subsidizing banks not to lend them money?

Rational decision making comes down to a comprehensive measure of cost and benefits. The Fed’s effort to use monetary policy to overcome bad fiscal and regulatory policy long ago reached the point of diminishing returns. The benefits of a third round of quantitative easing will almost certainly be de minimis. But when economic growth does return, Fed actions will have to be reversed in an era of rising interest rates, and the marginal cost of a QE3 tomorrow will almost certainly be far greater than the marginal benefit today.

Someday, hopefully next year, the American economy will come back to life. Banks will begin to lend, the money supply will expand, and the velocity of money will rise. Unless the Fed responds by reducing its balance sheet, inflationary pressures will build rapidly.

At that point the cost of our current monetary policy will be all too clear. Like Mr. Obama’s stimulus policy, Mr. Bernanke’s monetary expansion will ultimately have to be paid for.

The Fed softened the recession by its decisive actions during the panic of 2008, but the marginal benefits of its subsequent policy have almost certainly been small. We may find the policies that had little positive impact on the recovery will have high costs indeed when they must be reversed in a full blown expansion.

Mr. Gramm was chairman of the Senate Banking Committee and is senior partner of US Policy Metrics. Mr. Taylor is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He was undersecretary of the Treasury for international affairs in the first George W. Bush administration.

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Why did the U.S. recover faster from the panic of 1907 than from the 2008 recession and the Great Depression?

By Phil Gramm and Mike Solon

Commerce Department data released last Friday show that four years after the recession began, real gross domestic product per person is down $1,112, while 5.8 million fewer Americans are working than when the recession started.

Never before in postwar America has either real per capita GDP or employment still been lower four years after a recession began. If in this “recovery” our economy had grown and generated jobs at the average rate achieved following the 10 previous postwar recessions, GDP per person would be $4,528 higher and 13.7 million more Americans would be working today.

Behind the startling statistics of lost income and jobs are the real and painful stories of American families falling further behind: record high poverty levels, record low teenage employment, record high long-term unemployment, shrinking birthrates, exploding welfare benefits, and a crippled middle class.

As the recovery faltered, President Obama first claimed the weakness of the recovery was due to the depth of the recession, saying that it was “going to take a while for us to get out of this. I think even I did not realize the magnitude . . . of the recession until fairly far into it.”

But, in fact, the 1981-82 recession was deeper and unemployment was higher. Moreover, the 1982 recovery was constrained by a contractionary monetary policy that pushed interest rates above 21%, a tough but necessary step to break inflation. It was also a recovery that required a painful restructuring of American businesses to become more competitive in the increasingly globalized economy. By way of comparison, our current recovery has benefited from the most expansionary monetary policy in U.S. history and a rapid return to profitability by corporate America.

Despite the significant disadvantages the economy faced in 1982, President Ronald Reagan’s policies ignited a recovery so powerful that if it were being repeated today, real per capita GDP would be $5,694 higher than it is now—an extra $22,776 for a family of four. Some 16.9 million more Americans would have jobs.

The most recent excuse for the failed recovery is that financial crises, by their very nature, result in slower, more difficult recoveries. Yet the 1981-82 recession was at least in part financially induced by inflation, record interest rates and the dislocations they generated. The high interest rates wreaked havoc on long-term lenders like S&Ls, whose net worth turned negative in mid-1982. But even if we ignore the financial roots of the 1981-82 recession, the financial crisis rationalization of the current, weak recovery does not stand up to scrutiny.

The largest economic crisis of the 20th century was the Great Depression, but the second most significant economic upheaval was the panic of 1907. It was from beginning to end a banking and financial crisis. With the failure of the Knickerbocker Trust Company, the stock market collapsed, loan supply vanished and a scramble for liquidity ensued. Banks defaulted on their obligations to redeem deposits in currency or gold.

Milton Friedman and Anna Schwartz, in their classic “A Monetary History of the United States,” found “much similarity in its early phases” between the Panic of 1907 and the Great Depression. So traumatic was the crisis that it gave rise to the National Monetary Commission and the recommendations that led to the creation of the Federal Reserve. The May panic triggered a massive recession that saw real gross national product shrink in the second half of 1907 and plummet by an extraordinary 8.2% in 1908. Yet the economy came roaring back and, in two short years, was 7% bigger than when the panic started.

It is certainly true that the economy languished in the Great Depression as it has over the past four years. But today’s malaise is similar to that of the Depression not because of the financial events that triggered the disease but because of the virtually identical and equally absurd policy prescriptions of the doctors.

Under President Franklin Roosevelt, federal spending jumped by 3.6% of GDP from 1932 to 1936, an unprecedented spending spree, as the New Deal was implemented. Under President Obama, spending exploded by 4.6% of GDP from 2008 to 2011. The federal debt by the end of 1938 was almost 150% above the 1929 level. Publicly held debt is projected to be double the 2008 level by the end of 2012. The regulatory burden mushroomed under Roosevelt, as it has under Mr. Obama.

Tax policy then and now was equally destructive. The top individual income tax rate rose from 24% to 63% and then to 79% during the Hoover and Roosevelt administrations. Corporate rates were increased by 36%. Under Mr. Obama, capital gains taxes are set to rise by one third, the top effective tax rate on dividends will more than triple, and the highest marginal tax rate will effectively rise by 21.4%.

Moreover, the Obama administration’s populist tirades against private business are hauntingly similar to the Roosevelt administration’s tirades. FDR’s demagoguery against “the privileged few” and “economic royalists” has evolved into Mr. Obama’s “the richest 1%” and America’s “millionaires and billionaires.”

Yet, in his signature style, Mr. Obama now claims our weak recovery is not because a Democratic Congress said yes to his policy prescriptions in 2009-10 but because a Republican House said no in 2011. The sad truth is this president sowed his policies and America is reaping the results.

Faced with the failed results of his own governing strategy of tax, spend and control, the president will have no choice but to follow an election strategy of blame, vilify and divide. But come Nov. 6, American voters need only ask themselves the question Reagan asked in 1980: “Are you better off than you were four years ago?”

Sadly, with their income reduced by thousands, the number of U.S. jobs down by millions, and the nation trillions deeper in debt, the answer will be a resounding “No.”

Mr. Gramm, a former U.S. senator from Texas, is the senior partner at U.S. Policy Metrics, where Mr. Solon, a former senior budget staffer in both houses of Congress, is also a partner.

This may not be your grandfather’s Great Depression, but many aspects of today’s situation would remind him of the 1930s. If the recession that officially ended a year ago feels uncomfortably surreal to you yet familiar to him, it’s probably because the recovery went missing.

During the average recovery since World War II, gross domestic product (GDP) surpassed the pre-recession high five quarters after the recession began. It has never taken longer than seven quarters. Yet today, after 11 quarters, GDP is still below what it was in the fourth quarter of 2007. The economy is growing at only about a third of the rate of previous postwar recoveries from major recessions.