Democrats and Republicans are both pointing a lot of fingers at one another, blaming each other for the current dismal state of the U.S. fiscal position - the debt. The Dems blame Bush II and Reagan, arguing that irresponsible tax cuts are the culprit causing this debt. Republicans point out that the debt increased more under the three years of Obama than it did under all eight years of Bush II, and worse still, more than all the presidents combined from Washington through Reagan. This is of course due to excessive entitlement spending on the part of Democrats and notoriously poor spending programs initiated by Obama.
Too bad the Republicans consider only nominal rather than real debt, or debt as a percentage of GDP. I guess they forgot that under Bush II federal expenditures increased more than 53% in real terms, 29% in real per capita terms, and went from 19.3% of GDP to more than 25%. Oh, and in some of those years the Republicans controlled both houses of Congress. So much for the party of limited government making the case for less spending.
The current negotiations are not likely to produce effective legislation, especially legislation that will actually address the exploding and unsustainable debt position of the U.S. government. If anything, there will be a lot of smoke and mirrors, a lot more political posturing, and a lot of gimicks and obfuscation of the data without substantial changes to reducing the debt from it's current level of 95.5% of U.S. GDP. (Oops, even that figure is contentious. Currently, debt held by the public equals about 65% of GDP [$9,754 billion/$15,018 billion], but including agency debt brings the total debt figure to $14,343 billion, which is about 95.5% of GDP. There is no such thing as defaulting on the $4,589 billion agency debt since technically things like Social Security and VA benefits are not guaranteed, so not paying retirees or veterans is not technically a default. I wonder what voters would think of this if they knew SS and VA benefits were not considered by their government as guaranteed?) In either case, there is no way politically that politicians will agree to raising taxes and/or simultaneously reducing expenditures (i.e., benefits). That's not what gets them re-elected. So, until we all en masse agree to give up our favorite subsidies, retire later, and eliminate tax loopholes, we're headed towards a crisis like that in Europe.
With that said, the following graphs show federal government revenues and expenditures and debt as a percentage of GDP since 1960 (and beyond for some), broken down by four-year presidential cycles.
Graph 1 shows government revenues and expenditures beginning with October 1961 and going through March 2011. The vertical gridlines separate each of the four-year cycles of a president's influence. So, for example, Kennedy was elected in November of 1960, took office in January of 1961, but for the most part he had little influence over the budget until October of that year. His influence then continued for the next four years, to October, 1965. (Lyndon Johnson is actually responsible for half of Kennedy's fiscal policy, as is Ford responsible for half of Nixon's second term. For convenience, I've just combined them as part of their predecessor's term.)
Graph 1
We see the major divide between revenues (blue) and expenditures (red) beginning with the end of Carter and start of Reagan in 1980-1981, but it's actually well before 1981 that deficits became a normal part of fiscal policy, a lot of it is just not apparent when graphed nominally. Still, there is a brief period under Clinton II where revenues exceeded expenditures, but that was the result of budgeting gimmicks and reductions in the trend on spending for defense and Medicare & Medicaid, which I'll explain more below.
The next graph (below) shows federal government revenues and expenditures as a percentage of GDP, a more relevant comparison. We now see that deficits became a regular feature of government budgeting beginning in 1969.
Graph 2
We can also see that beginning with the Johnson administration (i.e., The Great Society programs) and continuing through 1983, federal government expenditures as a percentage of GDP increased from about 16% to just over 24%. It then leveled off, followed by a gradual decline that hit 18.8% in 2000, its lowest level since 1969. That was followed by a resurgence in government spending relative to GDP under GWBush and continuing with Obama to its current level of 25% and change.
For spending to decrease (increase) as a percentage of GDP, either spending declined (increased) at a faster rate than did GDP, or GDP increased (declined) at a faster rate than did expenditures. This is a very important distinction. So, for example, the substantial declines in spending as a percentage of GDP during Reagan's and Clinton's reign were due largely to the rapid growth in GDP following periods of recessions. They were not the result of reductions in expenditures; expenditures increased under both of their terms in office. Similarly, expenditure increases relative to GDP during Nixon and the beginning of Reagan (and with both Bush II and Obama) were due in part to large decreases in GDP due to recessions. (See the chart below.)
What is evidenced by this graph is that government expenditures overall have expanded relative to GDP since Kennedy, with only a few years where GDP was increasing more rapidly as a result of recovering from recessions. Government is consuming more of our scarce resources and our overall economic output.
Graph 3 shows federal government deficits as a share of GDP averaged over the four years of each presidential cycle. If government spending increased by an average of 7% over a four-year cycle while revenues increased by, say, 3%, debt as a percentage of GDP increased 4% per year over that president's term and the bar is correspondingly negative. Any bar above zero (i.e., positive) means that receipts as a share of GDP increased more rapidly than did expenditures, and if negative, expenditures as a share of GDP increased more rapidly than did receipts.
Graph 3
Only one president over the past 45 years ran surpluses on average over the four years of his term, and even that one was based on accounting gimmicks. Clinton II is positive by a little less than one percent on average for each of the four years of Clinton's second term, but that surplus is due largely (not completely) to above normal capital gains revenues due to the dot.com bubble and robust economic growth under his two terms in office. Spending still increased substantially under Clinton, in fact, more than what was collected in revenues. His deficit was masked by Social Security surpluses that more than offset his operating deficit, and with a little left over, making it look like he actually produced a surplus.
Here's how. Suppose one year the government collects $100 in corporate and individual income taxes (and a slew of others, but we'll stick with just these) and spends $125 on everything but OASDI. It therefore runs a $25 deficit. But suppose payroll tax collections (not included in the $100 above) are also $100 and that the Social Security Administration (and the VA) pay out just $65 to current retirees and the disabled. There is a surplus, which is used to purchase U.S. Treasury bonds. The $35 surplus is now used to fund the $25 deficit and the rest of it makes it look like Clinton ran a $10 surplus. It's an accounting gimick since payroll tax surpluses are supposedly dedicated for future expenditures, it's just that the government spends them today as part of its operating budget.
Some want to argue that the debt ceiling debacle and overall government spending limits are two separate issues; they are not. It would also be unwise to eliminate the debt ceiling provision given that it is a regular reminder of how unwise our expenditure and tax policies can be.
When you include state and local expenditures - but mostly federal - total government expenditures in this country increased from 7.5% in 1929 to 25% in 1961 to 40% in 2011. The Left accuses Republicans of being ideologues - almost neanderthals - for not giving in on their demand for large and legitimate spending decreases as a condition for agreeing to an increase in the debt ceiling. Given that governments in this country directly control 40% of our economic output and Democrats are unwilling to agree to any attempts to reign it back to something actually sustainable, I'm having a hard time determining who are the ideologues.
UPDATE: Although expenditures as a percentage of GDP declined under Clinton II, as I noted above, this was based largely on flawed accounting standards and rapid economic growth. But we can also see from the graphs below that both national defense as a percentage of GDP and expenditures on Medicare and Medicaid decreased significantly during the 1990s. This was not political will on the part of Clinton, it was simply national trends from which he benefitted immensely.
Graph 4
Graph 5
Great summary Dr. Steckbeck-I'm loving the charts!
Posted by: Neal Inman | July 25, 2011 at 09:14 PM
Strong arguments but I need to know your view on the following events to determine if you are, in fact, what you accuse the Democrats of being...
Was it sound or unsound fiscal policy for Bush II to cut taxes w/o the Congress cutting programs in a likewise fashion?
Same question for both middle Eastern wars
Same question for the prescription drug entitlement increase.
(My presumption is that you saw them as wrong-headed and economically irresponsible. Could you point to some web history that demonstrates your view at the time?)
Did this over-stimulus add to the bubble that crashed the economy in 2008?
The priority for our government should be stimulating demand which will in turn create jobs. My favorites are transportation infrastructure, education, renewing the power grid. These enable all Americans to better compete internationally.
Posted by: Jack Jackson | July 31, 2011 at 07:08 AM