Fiscal Conservatives and Their Illogical Point of View

A few months ago, Peggy Noonan, Reagan’s old speechwriter, writing in the Wall Street Journal, asked: “When George W. Bush first came on the scene in 2000, did you understand him to be a liberal in terms of spending?” Other conservatives, such as Bruce Bartlett, have also criticized GW for spending too much. (For whatever reason, the Republican Congress doesn’t seem to merit anywhere near as much, if any, criticism, though presumably they could hold him back if they chose to do so.)

Now, I tend to agree that GW spends way too much. But, there are two sides to running a deficit, and focusing on outflows while ignoring inflows is asinine.

According to the OMB, in 2005, the deficit was 2.6 percent of GDP, federal spending was 20.1 percent of GDP, and tax revenues were 17.5 percent of GDP. Presumably, GW’s tax cuts had already started having an effect, as there has been some crowing about the size of tax revenues by prominent conservatives.

In 2000, the last year before GW took office, the surplus was 2.4 percent of GDP, federal spending was 18.4 percent of GDP, and tax revenues were 20.9 percent of GDP.

As a simple counterfactual, say that tax revenues had stayed at 20.9 percent of GDP as it was in 2000, but spending had increased as it did from 18.4 percent of GDP to 20.1 percent of GDP, as it has under GW. This would lead to a reduction in the surplus of 1.7 percent, resulting in a surplus of 0.9 percent of GDP in 2005.

But say instead, that spending had stayed the same as it had been in 2000, but that tax collections had, as they actually did, fallen from 20.9 percent of GDP to 17.5 percent of GDP. This would have resulted in a 0.8 percent deficit.

All of which is to say – if GW had increased spending but not cut taxes, there would be no deficit. If GW had kept spending constant but still cut taxes, we would still have a deficit.

Now, a conservative might argue that this is unfair – that the tax cuts will eventually lead to much higher tax revenues as a percentage of GDP. But… during the Reagan – GHW Bush era, tax revenues as a percentage of GDP peaked in 1981, and achieved their second highest point in 1982. In other words, tax revenues as a percentage of GDP were highest before the Reagan tax cuts took effect. Similarly, under Clinton, tax revenues as a percentage of GDP were at their lowest at the start of his term, before the tax increases.

Therefore… it doesn’t make much sense for a fiscal conservative to criticize GW for spending too much but praise his tax cuts.

Update… Minor grammatical corrections and two sentences added.