Growth and the Federal Budget:
A Sixty-Six Year Historical Analysis
I address in this essay the question of whether and by how much the federal budget was in deficit, and what the performance of the economy was during the terms of presidents beginning with Truman through Barack Obama. It is a long essay, and it has tedious numerical comparisons. In short, I think most will find it very boring and long-winded. So only those who have a burning curiosity about the topic should proceed.
Recently I read a speech delivered by my anarchist-libertarian congressman, Tom McClintock, and it riled me because of its erroneous claim that Reagan cut federal spending. In fact, Reagan increased federal spending, let me make it clear. McClintock is blinded by his reverence for Reagan to the extent that he is willing to alter history. He gave another short speech in Congress that I admire, see here, but it also lacks a critical analysis of the causes of budget imbalance. The trajectory of today’s budget is dangerous and needs rectifying, but the main cause is a medical and health care system with out-of-control pricing and costs. I have dealt with that in another essay, see here, and it receives much ado in public discussion. This question of the influence of the budget’s deficits, surpluses, national debt, and growth, and shared growth — it’s fascinating. Proceed if you agree.
Congressman McClintock’s Talk on Tax Reform,
I annotate the speech with notes in blue, September, 2017.
NTLF Tax Colloquium
August 18, 2017 Speeches
Thank you for organizing this discussion on tax reform.
I believe the most important mandate given to this administration and this Congress is to revive our economy. Our success or failure will largely be determined on achieving this objective and will be judged by the answer every American gives to Ronald Reagan’s question in both 1980 and 1984: “Are you better off than you were four years ago?
In order for this answer to be a resounding “YES,” our economic reforms have to be enacted this year for them to have time to improve the economy and most importantly, the daily lives of individuals, by next year.
The good news is that we know how to do this because we’ve done so many times before. When Ronald Reagan took office in January of 1981, we suffered double digit unemployment,
Fact check: 7.5% unemployment for January, 1981:
double digit inflation (10.3%) and double digit interest rates (19.08). Reagan diagnosed the challenge with these words: “In this great economic crisis, government is not the solution to our problems – government IS the problem.” He rolled back the tax and regulatory burdens that were crushing the economy. He slashed the top federal income tax rate from 70 percent to 28 percent and cut federal spending by one percent of GDP. (Fact check, wrong, he increased spending, see below) He produced one of the most prolonged economic expansions in our nation’s history and because of that growth, our revenues nearly doubled.
Fact check: In constant dollars (2009 chained dollars) revenues increased by 25%, 1982 to 1989 inclusive, they did not double. And outlays increased by 19%. But his average yearly deficit was 4.1% of GDP, only surpassed by Obama whose yearly average deficit ran at 4.6% of GDP. The federal debt under Reagan increased from 32% of GDP to almost 50%. (See Historical Tables, Table 1.2 and 1.3. And see Federal Reserve FRED, here.) From 1982 to 1994, the twelve years of Republican presidents, the federal debt increased from 32% of GDP to 64%. (Each president operates the first year on the budget of his predecessor. Therefore I ascribe the years 1982 to 1989 to Reagan, and continue post-dating for all presidents.)
This wasn’t a uniquely Republican policy. John F. Kennedy did the same thing in the early 1960’s with the same result. Harry Truman abolished the excess profits tax in 1945, reduced income tax rates and slashed federal spending from $85 billion down to $30 billion in FY 1946. Fact check: World War II ended in victory, and the special taxation and spending for the war ended. The increase was needed solely for the war. The result was the post-war economic boom. To credit tax policy with the economic boom is a wild stretch of the economic facts. Economic growth during the WWII war years exceeded growth of any other period in American history, a direct result of high taxes, borrowing and high spending.
After his drubbing in 1994, Bill Clinton announced that the era of big government was over. He approved what amounted to the biggest capital gains tax cut in American history (Fact check: not accurate, see the graph, the 1976 Tax Reform bill passed under President Ford holds that distinction), overhauled entitlement spending – in his words, ending welfare as we know it – (Welfare is only one aspect of so-called entitlement spending. Social Security and Medicare are far larger, and Clinton did not cut them.) and cut federal spending by 4 percent of GDP. By 3.1% of GDP. He also raised taxes by 3.0% of GDP. The fact that Clinton raised taxes is carefully avoided by Mr. McClintock, it does not fit into his always-cut-taxes proposal.
The efficacy of these policies should be beyond reproach. But I would like to offer a few caveats. (McClintock cannot acknowledge that Clinton raised taxes. That’s a caveat for the reader to offer.)
FIRST, we DO need to worry about debt. Tax reductions without spending restraint simply shifts taxes to the future and crowds out investment capital that would otherwise be available for economic expansion as government borrows to cover the difference. Reagan’s one percent cut in spending relative to GDP — the basic error of McClintock’s speech — still increased debt relative to GDP -- but our debt was less than $1 trillion. Today it is over $20 trillion. (Debt is properly measured as a percentage of GDP, not as a nominal money amount. This comparison, $1 trillion to $20 trillion is meaningless and misleading. See the table below for the range of Debt to GDP over the years. The idea that government borrowing “crowds out investment capital” is wrong. Keynes dealt with idea in his open letter to Roosevelt published in the New York Times in January, 1933. See paragraph 5.)
Fact check: Wrong. Reagan did not cut “spending relative to GDP”. Just the opposite. Federal outlays before Reagan, between 1975 and 1981 (inclusive 8 years), averaged 20.2% of GDP (Historical Tables, U.S. Budget, Table 1.3). Reagan increased spending by 1.4% of GDP, from 20.2% to 21.6% of GDP as an average for the 8 years in office. This was a record high in federal spending since World War II, only to be exceeded by Obama’s 8 years, who’s spending averaged 21.7%, or just 0.1% higher than Reagan’s average spending. McClintock will never admit that Reagan almost outspent Obama, just missing by 0.1% of GDP. Reagan also cut revenues (from 17.8% of GDP to 17.5%) while raising expenditures (from 20.2% of GDP to 21.6%). That’s a swing of 1.7% of GDP, equal to $323 billion per year in today’s dollars, or $2.6 trillion over 8 years. National debt increased from 32% of GDP to almost 50.0% of GDP under Reagan.
Keynes in the 1930s urged Roosevelt to run a deficit, to spend, to go into debt, which Roosevelt did. Between 1933 and 1941 the deficit averaged 3.5% of GDP per year. (See note at end of essay.) There was no alternative but to inject capital into the economy, Keynes explained. Private investors saw no positive outcome, and purchasers had lost their incomes and savings. Only government had the means to create employment and inject purchasing power into the economy. This Keynesian policy is what Reagan did in the 1980s, although what he did is referred to as “military Keynesianism” because predominantly he invested in the military. Roosevelt invested in public works and direct public employment.
Reagan while cutting taxes increased spending — the perfect recipe for creating debt — and his average deficit was 4.2% of GDP for his 8 year term, and the national debt grew from 31.3% to 50.0% of GDP.
See Historical Tables of the U.S. Budget, 2017, pages 29 and 30, and 35 and 36. After cutting taxes in his first year, Reagan raised taxes eleven different times, see this article that quotes Reagan’s biographer who says, “And so there's a false mythology out there about Reagan as this conservative president who came in and just cut taxes and trimmed federal spending in a dramatic way. It didn't happen that way. It's false.” In the interview David Stockman, Reagan's budget chief comments about Reagan raising taxes subsequent to the early tax cut, "He wasn't very happy about it. He did it reluctantly. But at the end of the day, the math was overwhelming."
And according to this article he raised taxes and took the wrong side on many issues.
average revenues outlays deficit national debt as % GDP
32.0% in 1973
Eight years before Reagan: 17.8% 20.2% 3.3% of GDP 31.3% in 1981
1974 to 1981
Eight Reagan years 17.5% 21.6% 4.2% 50.0% in 1989
1982 to 1989
G. H. W. Bush, Bush I, ran into a recession in 1990. His job growth creation and his GDP growth per capita were both one quarter the rates of Reagan’s years, but his imbalanced spending and taxing ratios were the same. Bush I grew the national debt by 12.8% of GDP in only 4 years, rivaling Reagan’s 8 year growth of 14.1%. The median household income also fell during Bush I’s term.
In Clinton’s first budget year, 1993, revenues came in at 17.0%, and outlays were 20.7%, the deficit was 3.8%. By year 2000, Clinton had reversed this so that budget revenues were 20.0%, and outlays 17.6%. Instead of being in deficit by 3.8% he ran a surplus of 2.3%, a swing of 6.1% of GDP, which today would equal $1.17 trillion . In other words, Clinton raised taxes by 3.0%, while cutting spending by 3.1%. Representative Tom McClintock studiously avoids mentioning Bill Clinton’s tax increases, and ignores Reagan's very high spending.
Clinton cut spending by 4 percent of GDP
Fact check: Clinton cut spending by 3.1% of GDP (U.S. Budget, Historical Tables, Table 1.2).
and was successful in reducing debt relative to GDP. (Clinton also raised tax revenues from 17.1% under G. H. W. Bush, to 18.7%. See the table below) The budget pending before the House starts that process, but we have a long way to go, and we can’t safely count on economic growth to fully offset lost revenue.
Trump projects a growth rate of 2.9% per year for ten years, a rate 1.1% above the CBO projection and ridiculed as fantasy thinking. The CBPP states, “Unrealistic growth projections not only make deficit-increasing tax cuts appear more affordable than they actually are, but could also add to pressure for cuts in programs for low- and middle-income families if the promised growth fails to materialize.”
G.W. Bush’s presidency was marked by large tax cuts in 2001 and 2003, and large expenditures for wars in Iraq and Afghanistan, and by a policy of regulatory laxity that resulted in the self-destruction of the financial system, and the collapse of an enormous asset bubble in the price of housing. As the banks began failing, the greatest recession in 75 years was instigated. During G.W. Bush’s last 14 months the economy slid into a deepening recession, and Obama ended the recession 4 months into his term of office. Obama’s revenues fell to 14.6% of GDP for two years, in 2009 and 2010, a drop of 5.4% from Clinton’s highest revenue total of 20.0% in year 2000. The recession pushed Obama’s revenues to 27% less revenue than Clinton’s revenues. A drop of 5.4% of GDP in today’s economy is $1.03 trillion.
Revenues during the Bush II presidency averaged 16.5% of GDP, this is 2.2% lower than the Clinton 8 year average. That would equal $442 billion in today’s money, and continued over 8 years would reach a $3.5 trillion shortfall. Bush II failed to raise adequate revenues, and he ran the economy into the ground. Obama later in his second term managed to revive the economy, 14 million jobs were created, but revenue totals for his entire presidency averaged just 16.8% of GDP, slightly higher than the Bush II average, and lower than Reagan’s revenue average of 17.5% of GDP. G.W. Bush average revenue total of 16.5% of GDP are the lowest of all presidents since Truman in 1950. (see page 29)
If lower taxes make for a good economy, then Bush II’s term definitely refutes this argument. The decade 2000 to 2010 witnessed the slowest growth since the 1930s, slower than any decade by half. Professor Andrew Sum summarized this decade: “First, the nation’s real Gross Domestic Product, a measure of the aggregate output of final goods and services, grew by only 17% over the past decade, the worst economic performance in 70 years. In the 1990s, the US economy grew by 40%, and we never experienced a GDP growth rate below 37% since the 1930s. Adjusted for population growth, real GDP per capita increased by only a little over 7%, again a 70 year record low.”
Obama had the misfortune of serving during the worst depression in 75 years. As Robert Kuttner argues in his book Debtors’ Prison, Obama presided over a debt-deflation depression caused by a financial crisis. Obama’s deficit spending reflected increases to pay for the crisis in employment: unemployment insurance, food stamps, and added social aid for families and households thrown out of work, and bailing out the banks, but not the home owners. Almost 9 million workers (6% of all workers see here) were permanently laid off from their jobs, and 7.2 million (or one in every eight mortgage holders) lost their homes.
SECOND, (with apologies to the Bill Clinton campaign) IT’S THE SPENDING, STUPID. The European experience with austerity programs in the 1990’s illustrates this nicely. Austerity was a combination of tax increases and spending cuts. Those countries, such as Spain, Italy and Portugal that relied on tax increases did poorly. Those countries, such as Sweden, Finland, Denmark and Norway, which relied on spending cuts did very well. Between 1993 and 1997, Sweden reduced spending from 71.5 percent of GDP to 51 percent and its economic growth rate doubled relative to the prior decade. (See the comparison of government spending from an OECD study. The U.S. total is 37.6% of GDP. The U.S. ranks sixth lowest out of 30 other advanced nations. And see Chart 9 here, describing the austere spending since 2009 compared to all other U.S. recessions. In another speech, this one in the House, Representative McClintock argues that our tax rate is now verging on the highest possible “natural” amount, after which tax evasion and moving citizenship to other lower tax nations will occur. This is patently false. Twenty-four other nations have higher rates.)
THIRD, flattening and broadening the tax base is just as important as lowering rates. The Mercatus Center at George Mason University estimates that tax compliance costs the economy $1 trillion annually including capital misallocation caused by political preferences littering the tax code. The more we flatten and broaden that code, the fewer distortions in the flow of capital and the greater the productivity of capital allocations. (The $1 trillion figure is meaningless, it probably just reflects normal accounting activity. By “flatten” he must mean tax all incomes at the same “flat tax” rate, and “broaden” must mean eliminate tax deductions which are also called tax expenditures. Since 2011 the Republican budget plan has advocated cutting tax expenditures, but never have they presented specific cuts, leaving one to conclude that they won’t risk offending anyone, or that they really do not have a plan whatsoever.)
FOURTH, lowering rates does matter. In the last sixty years, the top income tax rate has been as high as 92 percent and as low as 28 percent, but income tax revenues have stayed remarkably steady at between 13 and 20 percent of GDP. (The economy grew faster and shared its prosperity with all income levels when the top marginal income tax rates were 90% on income in excess of $1 million. This is indisputable. See here— State of Working America. (And see here and here and here and here — compare years 1946 to 1976 (when the lower 90% of earners received about 72% of all growth), and then compare years 1976 to 2008 (when the lower 90% received 1% of all growth). Also the corporate tax was much greater. For instance, in 1949 corporate taxes equaled 72% of the income tax, and in 2015 they equaled 22%.) Indeed, some of the lowest income tax revenues came when the top tax rate was at its highest. Some of the highest revenues came when the top rate was quite low. But although the tax rate within this envelope has remarkably little effect on revenues relative to GDP, it has a huge impact on the growth of GDP, and thus the growth of total revenues. (He offers no example of this claim. The tables I present below investigate the relationship between growth and deficits. The economy grew at its fastest during the period 1946 to 1976, a fact. The highest income tax rate varied from 91% to 70% on incomes over $1 million. In the 30 year period, 1947 to 1976 inclusive, the federal government ran a deficit of 0.6% of GDP per year, on average. In the same 30 year period personal income increased at a rate of 3.3% per year and all income groups saw their incomes double in inflation adjusted dollars. This was the greatest era of shared prosperity in American history. The highest tax rates were between 70% to 91% on income above $1 million. The effective tax rate on high incomes was between 45% and 55%. Saez, Piketty and Zucman.)
Finally, what are the prospects of getting this done? The good news is that past performance is not (necessarily) an indicator of future results. I am still optimistic that we will be able to get the tax bill done this fall for three reasons. First, reconciliation was poorly adapted for policy reform like health care but is very well adapted for tax reform. Second, the thorniest matter, the Border Adjustment Tax, has been dropped from the discussion. And third, this HAS to be done and every one of my colleagues fully understands this.
Here is a quote from the Piketty, Saez, and Zucman paper, page 18. It capsulizes the growth imbalances of the past 34 years:
“Table 2 decomposes growth by income groups since World War II in two 34 year long subperiods.
From 1946 to 1980, real macroeconomic growth per adult was strong (+95%) and
equally distributed—in fact, it was slightly equalizing, as bottom 90% grew faster than top
10% incomes.33 In the next 34 years period, from 1980 to 2014, aggregate growth slowed down
(+60%) and became extremely uneven. Looking first at income before taxes and transfers,
income stagnated for bottom 50% earners: for this group, average pre-tax income was $16,000
in 1980—expressed in 2014 dollars, using the national income deflator—and still is $16,200 in
2014. Growth for the middle 40% was weak, with a pre-tax increase of 42% since 1980 (0.8% a
year). At the top, by contrast, average income more than doubled for the top 10%; it tripled
for the top 1%. The further one moves up the ladder, the higher the growth rates, culminating
in an increase of over 600% for the top 0.001%—ten times the macroeconomic growth rate.
Such sharply divergent growth experiences over decades highlight the need for growth statistics
disaggregated by income groups.”
Here’s Warren Buffett’s advice in a New York Times op-ed in 2011: “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.
Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on average — but the rate paid had fallen to 21.5 percent.”
From 1981 to 2017, The Federal Budget, Growth of U.S. Debt, U.S. Job Growth, and More
Receipts Outlays Deficit Growth of National Debt as % of GDP
Reagan 17.5% 21.6% 4.1% / yr 35.8% to 49.9%
8 year average +14.1%
1982 to 1989
G.H.W.Bush 17.1% 21.3% 4.1% / yr 49.9% to 62.7%
4 years +12.8%
1990 to 1993
Clinton 18.7% 18.8% 0.3% / yr 62.7% to 54.9%
8 year average - 7.8%
1994 to 2001
G.W. Bush 16.5% 19.9% 3.3% / yr 54.9% to 77.4%
8 year average + 22.5%
2002 to 2009
Obama 16.8% 21.7% 4.6% / yr 77.4% to 104.1%
8 year average + 26.7%
2010 to 2017
Job Growth GDP per capita Real Median Household Income
Reagan 16.753 mn +2.0% / yr +2.8% / yr $48,096 to $53,367
+ 1.4% / yr
G. H. W. 2.367 mn +0.5% / yr +0.7% / yr $53,367 to $50,478
Bush - 1.4% / yr
Clinton 18.703 mn + 2.0% / yr +2.9% /yr $50,478 to $56,531
+ 1.5% / yr
G. W. Bush 4.374 mn + 0.4% / yr +0.6% / yr $56,531 to $54,988
- 0.4% / yr
Obama 9.929 mn + 0.9 / yr +1.5% / yr $54,988 to $56,516
+0.3% / yr
from Dec. 2009 to Jan. 2017 jobs grew by 1.4% / yr, some 14.1 million new jobs
Obama years median household income: began at $54,988 in 2009, dropped to $52,666 in 2012
Obama years median household income: began at $54,988 in 2009, dropped to $52,666 in 2012
rose to $56,516 in 2015 —- between 2012 and 2015 it rose at a rate of + 2.4% / yr
Fed. Debt as % of GDP — https://fred.stlouisfed.org/series/GFDEGDQ188S
see FRED for median Hh Income
Productivity Growth since 1950s see https://www.bls.gov/lpc/prodybar.htm
Tedious calculations go into this analysis. My last tedium is to compare the revenue shortfall of three presidents over their first 8 years of office, Roosevelt, Reagan, and Obama.
Unemployment rate dropped from 25% to 9.6%, 1933 to 1937 (see here, article by Marshall Auerbach at Roosevelt Institute). Roosevelt was re-elected in 1937 by a landslide mostly because of the reduction in unemployment. He achieved this by over-spending, going into debt.
During those first four years, 1933 to 1937 (5 years inclusive), average revenues averaged 6.7% of GDP, but his outlays averaged 13.3% of GDP, and the deficit averaged 7.4% of GDP. He really overspent!
(This comes from Table 1.2, Office of Management and Budget, Historical Tables— https://www.whitehouse.gov/omb/budget/Historicals)
Between 1933 and 1941 the economic output doubles, and between 1941 and 1945 it increases by 77%, the legacy of the WWII years. The number of citizens employed increased by 40% in the war years. The national debt expanded to 120% of GDP.
Also I discovered the following about disposable personal income, 1929 to 1944:
1929 to 1933 — down 26%, or down 6.5% per year
1933 to 1941 — up 67% in 8 years, or 8.3% per year
1941 to 1944 — up 18% in 3 years, or 6% per year
This originates from BEA.gov, Table 2.1, my own calculations
I questioned the results and checked with Measuring Worth, GDP per capita figures.
Measuring Worth, and a graph at Visualizing Economics
1929 to 1933 — down 28.5%, or 7.1% per year
1933 to 1941 — up 80%, or 10% per year
1941 to 1944 — up 44.8%, or 14.9% per year
Deficit hawks may object, they may claim that deficits cause runaway inflation, a sovereign debt crisis that forces high interest rates, and a crowding out of investment — all of this did not happen. The economy revived. With high taxation rates on corporations and high earners, along with strong union rights, the golden years of capitalism brought broadly shared prosperity.
During the Roosevelt era, his Federal Reserve Chair was Marriner Eccles, serving from 1936 to 1948. About the causes of the Great Depression, Eccles observed in his 1951 memoir, “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”
The greedy giant suction pump, sucking since 1980 until 2016, has sucked prosperity from half of the U.S. population since 1980. See the article by the Washington Center for Equitable Growth for a definitive analysis of the unequal growth over the past 36 years.
See the following two articles:
Article at “The Balance” on the deficit and debt over historical time.
And this article from the Economic Policy Institute about the danger of targeting deficit reduction too rapidly: “Dangerous targets
Why setting a specific deficit reduction target would worsen the economic and fiscal situation”
Why should this be important to Mr. and Mrs. Citizen? Because when Republicans assert flatly that tax cuts and low taxes in general create shared prosperity — this is clearly false. Tax increases on the wealthiest and their wealth, now valued at $94.8 trillion, which is also 6 times the size of the annual national income (see Federal Reserve report, Flow of Funds, page 2, and Bureau of Economic Analysis (BEA.gov) Table 2.1) are necessary.
revenue outlays deficit Growth in Nat. Debt as % GDP
Truman 16.7% 17.0% -1.3% from 85.6% to 69.2%
Eisenhower 16.9% 17.3% -3.0% from 69.2% to 50.6%
Kennedy - Johnson
17.3% 18.2% -0.8% from 50.6% to 35.4%
17.3% 18.2% -0.8% from 50.6% to 35.4%
Nixon - Ford 17.3% 19.3% -2.0% from 35.4% to 33%
Carter 18.3% 20.6% -2.3% from 33% to 34.0%
job growth Real GDP/capita Real Median Family Income
Truman +13.6% 9.3% — 2.3% / year +3.1% / year
Eisenhower +11.0% 15.2% — 1.9% / year +3.4% / year
Kennedy - Johnson +30.0% 27.0% — 3.4% / year +3.9% / year
Nixon - Ford +18.9% 22.2% — 2.8% / year 1.2% / year
Carter +7.0% - 0.7% — - 0.2% / year - 1.5% / year
I retrieved the data on Real Median Family Income for these years from State of Working America.
The data on Real median Household income is not available from any source for years before 1980.
There are thousands of mitigating factors determining economic growth and its balanced distribution. The U.S. government, at all levels — local, state and federal — spend about 37% of GDP. This is a very large portion of all spending. But the private economy has a far greater effect on the economy than the government’s budget.
The relationship of the deficits, debt and household growth should shed a little light on how important the debt is. The government should attempt to direct the economy towards high efficiency, productivity, and widely-spread prosperity. Over the past 34 years we have not had balanced growth among income classes. Society should direct the economy to provide a floor of basic services and goods. Too often the mantra of free market punishes the many while rewarding the few.