Wednesday, September 10, 2008

Country first

Got some blowback from the last piece on our fiscal situation. Some have questioned my mental health for suggesting that whatever our financial mess, it is inconceivable that a Democrat could do anything but make it far worse. Whatever the cause, it is not the Republicans.

It is Congress, they pass the money bills! It is old people and the AARP! It is Democrats who love to spend!

This argument reflects the old adage that, “If you aren’t a Democrat in your 20s you have no heart. If aren’t a Republican in your 40s you have no brain.” However, while Newt Gingrich and others worked hard to change the first part, the Republican Party long ago abandoned its principles of fiscal conservatism that were the root of the second part.

In the 1970s, as the Republican Party was embracing supply-side economics and jettisoning its long-held, conservative fiscal principles, Milton Friedman cautioned his Republican colleagues not to be disingenuous. Despite the tax-cut rhetoric that was becoming the Party’s new mantra, the true size of government is measured by spending, and fiscal deficits are simply deferred tax increases. To cut taxes and keep spending is not conservative, he insisted, it is simply dishonest.

As much as McCain supporters would like to cling to the notion that the Republican Party has remained true to its long-abandoned principles, the historical evidence does not support their argument. People, of course, are unlikely to change their political views based on actual data—and no right-thinking Republican would acknowledge that Bill Clinton and Robert Rubin did a better job on the economy that either George Bush and Michael Boskin—but the argument that Republicans are either the party committed to smaller government or balanced budgets is simply specious.

As illustrated in the graph below, going back forty years to 1968—the starting date for data readily available from OMB and the Congressional Budget Office—through twenty-four years of Republican leadership and sixteen years of Democrat leadership, the overall size of the federal government, as measured by total outlays, has remained largely constant at 20% of the Gross Domestic Product—economic shorthand for the size of the US economy. Most notable during this period has been the growth of entitlement programs—primarily Social Security, Medicare and Medicaid—which have risen from 5.6% of GDP to 10.6% of GDP, and the concurrent 44% decline in discretionary spending, which largely comprises defense and domestic spending.

As this graph illustrates, the most dramatic decline in discretionary spending came under Nixon—the last Republican president elected as a traditional fiscal conservative before the Reagan Revolution—as defense spending declined significantly with the wind-down of the Vietnam War. Discretionary spending also declined under Clinton—who on fiscal matters famously pronounced “We are all Eisenhauer Republicans now"—though Republicans are always quick to take credit for Clinton's budget success, a claim that is not supported by the data presented below. And discretionary spending decreased modestly under Reagan, as defense spending rose while discretionary spending declined.

Under Jimmy Carter, overall discretionary spending was flat—defense spending rose a bit, while domestic spending fell—while discretionary spending rose as a percentage of GDP under Ford and George W. Bush.

The data shows that discretionary spending, and in particular domestic spending, fell under both Democratic presidents, while it rose under both Bush presidents. The data on the public debt is less ambiguous, as illustrated below. Here, the pattern is clear. The change in Republican Party doctrine to embrace of supply-side economics brought with it an acceptance of deficit spending and a build-up of the national debt as the price of growth—even if over the long-term the growth never brought the books back into balance.

As illustrated here, the national debt declined under Nixon—an old-time conservative Republican—as well as under Carter.

Fiscal deficits took off during the Reagan presidency, as the Reagan tax cuts were implemented without commensurate reductions in federal outlays. The public debt doubled as a percentage of GDP during the Reagan-Bush years. During the Clinton years, shrinking deficits and ultimately budget surpluses contributed to a decline in public debt. Finally, under George W. Bush, new tax cuts combined with war spending have contributed to renewed growth in the national debt.

Faced with the evidence that Republican presidents have left a trail of deficits and debt in their wake, supporters insist that deficits are the fault of Congress, and particularly of Congressional Democrats. But here again, the OMB data tells a different story. Executive budget recommendations and the impact of Congress on spending and deficits are tracked within OMB data beginning in 1982. The OMB data presents the executive budget recommendation, the actual deficit that was realized, and determines the extent to which the difference—generally a higher deficit—resulted from Congressional over-appropriation, economic conditions or technical factors.

The graph below illustrates the annual executive budget recommendation for each year, and the impact of subsequent Congressional action in red. While Congressional spending bills over-spent the executive recommendations in almost all years, the impact of this overspending was generally a fraction of the deficit starting point in the executive budget.

This data suggests that—as one would hope would be the case—that the primary driver of fiscal outcomes is the recommended administration budget, despite the desire to put our fiscal mess at the feet of Congress. During the period 1982-2007, administration budget recommendations contained average deficits of 10% of outlays, while the average impact of Congressional over-spending was 1.9% of outlays. Prior to the current administration, where the impact of Congress is overstated due to administration decision to keep war funding out of the executive budget and rely instead on supplemental appropriations, Congressional over-spending averaged just 0.8% per year.

Nor does the data support the notion that the fiscal culprit is the innate profligacy of Democrats. Congressional over-spending during years when Democrats controlled both houses of Congress averaged 0.4% of outlays, and averaged 0.6% when Democrats controlled both houses of Congress and the White House. During years when Republicans controlled both houses of Congress, overspending averaged 2.3% of outlays, and it averaged 4.6% when Republicans controlled both houses of Congress and the White House.

No doubt the McCain campaign will continue to push the time-honored attacks against the tax and spend Democrats. A visceral appeal against "Barack Reid Pelosi O'Biden." But they will offer no evidence to support their claims, because the Republicans long ago lost that high ground. The fact is that both parties spend; the difference is whether they pay for their spending, or borrow the money and push off the day of reckoning.

Then they will argue that their policies are pro-growth. And, of course, that is true. All things being equal, lower taxes are stimulative. But that is not supply-side magic, just the old school Keynesian economics that Friedman inveighed against. To argue that we must continue with the policies that have gotten us here, you have to answer the question of how and when will we stop digging ourselves into an ever-deeper hole, and why it will not be increasingly painful the longer we wait.

This is the dilemma that years of debt and deficits have left us with: there are few good choices left today.

But as our fiscal situation is weighing heavier—as each American family is now burdened with its $265,000 share of the new debts that the nation has taken on in the past seven years—it is past time that we move beyond the old rhetoric and acknowledge—as Milton Friedman suggested years ago—that continuing these fiscal policies is irresponsible.

We all know that cutting taxes is great politics, and we would all rather pay less than more, but isn't John McCain running on the principle that it is time to put the country first?

1 comment:

Anonymous said...

Thanks David, this is really well thought out and put together, and for me, perhaps not surprisingly as an economist, it is the Republican’s intransigence on fiscal policy that is the single factor that makes it very unlikely I can vote for them in the fall. (While there are other things to dislike, the same can certainly be said of the D’s).

Even under Mr. Supply Side Reagan, the R’s signed off on a major tax increase to support Social Security, something the current party leaders almost certainly would not be willing to do. Another example of the change was the 1986 Tax Reform Act, in which the need to raise certain revenues in order to cut others was acknowledged. The assertion by the current Republicans in Congress that such a policy represents an unacceptable tax increase is a blatant example of single-entry accounting, which we know they should know better than. This is lying. Who would have ever thought we would look to the ‘80’s as an era of relative fiscal prudence?!!!

Their willingness under the current admin. to increase military spending while at the same time cutting taxes is one of the greatest abdications of leadership since the McCarthy era.

The willingness and ability of the R’s – many of whom are highly responsible as individuals -- to continue to advocate irresponsible policies is probably in part due to (1) the echo chamber effect governing so much of both parties’ activities; (2) Special interest politics masquerading as pro bono; (3) The inherent difficulty of assigning responsibility for budget outcomes (“I voted for that before I voted against it”) and (4) The lack of voter knowledge of the consequences of fiscal imprudence.

The closest I can come to a rationale for the Republican approach is the sense of existential anguish one experiences watching a legislature prepare a budget. This is well epitomized in our debate here on whether to raise teacher’s salaries. It is obvious that we cannot hope to attract good people in large numbers to a profession that pays little more than a low-level manager at Wal-Mart. On the other hand, even the slightest acquaintance with the public school bureaucracy is enough to make you wonder if in fact the Soviets didn’t win the cold war. (My son has recently returned to the public school system as a freshman in high school and I literally had a “Major Major” moment with the school counselor assigned to prepare his schedule.) On the one hand, I can sympathize with a politician who throws up their hands and decides that tightening the purse strings is the only option available. However, this argument carries a lot more weight here in New Mexico, where the Repub.’s are pretty much permanently in the minority. In Washington, the frequency with which they have controlled the purse strings invalidates the argument that somehow it is all beyond their control. Instead, it demonstrates their unwillingness or inability to develop cogent responses to those who are seeking the spending increase. If you can’t explain to poor folks why you won’t pay for better teachers, it is easier to simply argue against “government.” This is intellectually and morally bankrupt, or, as I recently read John McCain said about the swift boat campaign, “dishonest and dishonorable”.

Thanks for carrying the torch!