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Thursday 26 November 2009

…the real explosion in the federal debt began under Ronald Reagan who cut taxes while increasing government spending to levels previously exceeded only during the four years of World War II. (After six years with spending over 22% of GDP and two years over 23%, Reagan left office with federal spending running at over 21%. By contrast, President Clinton left office with spending at 18.5% of GDP.) The result was that the national debt increased more than 400% from less than a trillion when Reagan took office to over $4 trillion when President Clinton and a Democratic Congress finally increased taxes again in 1993. The deficits during those years are even more dramatic when you state them in current dollars. In 2009 dollars (using the OMB year-end debt figures and the St. Louis Fed GDP deflator), Reagan and the first Bush ran up cumulative deficits of roughly $5 trillion. (This despite favorable demographics that resulted in entitlement spending to decline temporarily from 11.9% of GDP in 1983 to 10.1% in 1988. Last year, by contrast, the figure was 12.5%.) The turning point in this deficit story was the 1993 Budget Act, about which I have written before, which was designed to eliminate the record budget deficits inherited by President Clinton. It included a large overall increase in taxes and extended the pay-as-you-go budget rules. It passed without a single Republican vote in Congress by the closest possible margin – by one vote in the House and with Vice President Gore breaking a 50-50 tie in the Senate. Republicans predicted that the economy would collapse as a result. Instead, it produced record budget surpluses and the strongest economy in a generation. But the Democrats paid a price, as they were crushed in the 1994 elections and lost control of Congress. Unfortunately, the lesson that was learned in Congress was that fiscal responsibility doesn’t pay politically. daggatt ☀

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