President Bush Discussing Mid-Session Review putting forth a host of myths including the propositions that: (1) the Laffer Curve is working; and (2) that his Administration is serious about cutting government spending. Where to begin?
One of the most important measures of our success in cutting the deficit is the size of the deficit in relation to the size of our economy. Think of it like a mortgage. When you take out a home loan, the most important measure is not how much you borrow, it is how much you borrow compared to how much you earn. If your income goes up, your mortgage takes up less of your family’s budget. Same is true of our national economy. When the economy expands, our nation’s income goes up and the burden of the deficit shrinks.
Our graph shows the total Federal debt relative to GDP from 1996 to 2007 (projected). The debt to GDP ratio had declined to 32.6% by 1981 but the type of fiscal irresponsibility we saw under St. Ronald Reagan led to a debt to GDP ratio equal to 67.3% before the fiscal sanity of the 1990’s finally took hold. By 2001, the debt to GDP ratio had declined to 57.4%. But the current fiscal irresponsibility has caused the debt to GDP ratio to rise to 64.3% as of the end of fiscal 2005. Table B.79 of the Economic Report of the President suggests that it will rise to 67.5% by the end of fiscal 2007. OK, this Administration does tend to high ball its short-term forecasts of deficits so the President can tout that his free lunch supply-side policies have led to more tax revenues than his bogus forecasts predicted. But every forecasts of the future debt to GDP ratio based on current fiscal policy has this ratio rising quite substantially. So when the President talks about the shrinking burden of the debt, he must be talking about what happened during the late 1990’s and not his own fiscal record.
President Bush also painted us Democrats as Marxists and the Republicans as Keynesians:
When I came to Washington, taxes were too high, and the economy was headed into a recession. Some said the answer was to centralize power in Washington, and let the politicians make the decisions about what to do with the people’s money. That was one point of view. We had a different point of view. I believe that the economy prospers when we trust the American people to make their own decisions about how to save, spend and invest. So starting in 2001, my administration worked with the United States Congress and we delivered the largest tax relief since Ronald Reagan was in the White House. We cut rates for everyone who pays income taxes. We reduced the marriage penalty, we doubled the child tax credit, and we cut the death tax. We cut the tax paid by most small businesses because we understand that most new jobs are created by small businesses. And we encouraged economic expansion by cutting taxes on dividends and capital gains. Together, these tax cuts left nearly $1.1 trillion in the hands of American workers and families and small business owners, and they used this money to help fuel an economic resurgence that’s now in its 18th straight quarter of growth. The tax cuts we passed work … Since August 2003, the U.S. economy has added more than 5.4 million new jobs. Our unemployment rate is down to 4.6 percent… Our job in Washington is to keep this expansion growing – going, and to promote pro-growth policies that let Americans keep more of their hard-earned paychecks and aid us in reducing our fiscal deficit. In order to reduce the deficit, you got to set priorities. And in working with Congress, we’ve set clear priorities. And the number one priority of this administration and this Congress is to make sure men and women who are defending the security of the United States and helping to spread peace through the spread of liberty get all the help they need from our government. We will always fund the troops in harm’s way.
Economies typically eventually recover from recessions even without the aid of aggregate demand policies. And if the Republicans think that tax cuts are the only way to increase aggregate demand, let me suggest that his version of tax cuts may not have even been the best way to restore full employment. But if we have reached full employment as the Republicans are suggesting – then the continued fiscal mismanagement of cutting taxes while having high government spending lowers national savings, which is what is behind the Federal Reserve’s decision to raise interest rates – which will crowd-out investment. But never mind my sermon – go check out Mark Thoma and the CBPP.
President Bush went on to imply that his Administration is cutting non-defense Federal spending but if one compared Federal spending as a share of GDP in 2005 versus what it was in 2000, spending has risen from 19% of GDP to 20.4% of GDP. The increase in the defense spending to GDP ratio was only 0.9% with the increase in nondefense purchases as a share of GDP being 0.2%. So even Federal transfers have risen faster than GDP. President Bush also seems to think that cutting about $30 billion in waste will solve a $600 billion per year General Fund deficit problem. Isn’t fuzzy math magical?
But it’s this part of his speech that really concerns me:
The next test is whether or not we can get a line-item veto out of the United States Senate. A line-item veto is an important tool for controlling spending. See, it will allow the President to target unnecessary spending that sometimes lawmakers put into large bills. Today when a lawmaker loads up a good bill with wasteful spending, I don’t have any choices. I either sign the bill with the bad spending or veto the whole bill that’s got good spending in it. And I think it would be wise if we’re seriously – seriously concerned about wasteful spending to enable the executive branch to interface effectively with the legislative branch to eliminate that kind of wasteful spending. And so we’ve proposed a line-item veto that the House of Representatives passed. Under this proposal, the President can approve spending that’s necessary; redline spending that’s not; and send back the wasteful, unnecessary spending to the Congress for a prompt up or down vote.
President Bush and his allies in Congress destroyed the paygo rules that served the Clinton Administration and Congress so well in the 1990’s. He also introduced Senator Ted “bridge to nowhere” Stevens just before his speech on his allegedly fiscally responsible regime. Look, I’m all for restoring fiscal discipline but I don’t trust either this President or the current GOP leadership in Congress. Currently if Senator Stevens wants another bridge to nowhere he must get at least a couple of sleazy Democrats to go along with him in some giant log-rolling scam – none of which President Bush has bothered to veto. President Bush and Karl Rove also treat the U.S. Treasury as some sort of giant partisan piggy bank. Unfortunately, we have to deal with this partisan and fiscally irresponsible President for two more years – but we don’t have to allow Dennis Hastert to be the Speaker for two more year. But imagine if we gave THIS President a line item veto and had a GOP dominated Congress at the same time. The new motto would be “pork is for us but not for thee” as Karl Rove’s loyal soldiers would pass out partisan goodies only to those who supported his agenda since President Bush could line item veto anything else.
Update: Menzie Chinn has more on both the short-term volatility of tax revenues and the long-term deficit prospects.
Update II: For those in Pennsylvania, take note. David Boaz of the Cato Institute describes Rick Santorum thusly:
So . . . the third-ranking Republican leader in the Senate wants to be known as a porker, an earmarker, and Senator Pothole … He declared himself against individualism, against libertarianism, against “this whole idea of personal autonomy, … this idea that people should be left alone.” Now he’s also against the conservative idea that taxpayers matter, that the federal government has a limited role … At least Santorum is right about one thing: sometimes the left and the right meet in the center. In this case the big-spending, intrusive, mommy-AND-daddy-state center. But he’s wrong that we’ve never had a firmly individualist society where people are “left alone, able to do whatever they want to do.”
Just another Bush Republican who keeps voting to increase taxes on our children!