February 21, 2014

Congress is not in session this week. I have been using the time to get through all the paperwork covering my desk and catch up on meetings here in Massachusetts. I came across two interesting reports from the Congressional Budget Office that I think tell an important story.

I warn you that there are lots of numbers in this newsletter and I realize some people lose interest if too much time is spent on statistics. I have tried to make my points early and simply, while still providing the data for those who would like to review it.

But Before I Get to the Numbers:

As I write this a media report just came out that illustrates a lot about an important issue of the day AND about the general likelihood of bipartisanship, and progress for the rest of this session.

The Hill newspaper reported today that the Weekly Standard quoted Speaker John Boehner in 1996 saying: “I’ll commit suicide before I vote on a clean minimum-wage bill”. I know this seems like a long time ago but since then he voted against increasing the minimum wage in 1996 when it was raised from $4.25 to $5.15 (and that bill was NOT “clean”, it included some tax breaks demanded by Republicans who controlled the House at the time) and voted against it again in 2007 when it was raised by a Democratic majority to $7.25.

Such comments and such a record do not bode well for dealing positively with this important issue — or any other. I hope we can overcome such a track record. And now on to my main topic this week: rhetoric versus statistics

The Bottom Line

The statistics and chart below will prove two points despite any rhetoric to the contrary:

1. Federal spending is headed towards the lowest share of GDP in memory;
2. The federal government is making great progress towards reducing our annual deficit.

A Note about Federal Spending

If you listen only to a few talking heads you might think that the federal government is engaged in a spending frenzy. That is actually not the case. In fact, our government is currently spending LESS than it did in 1974 on discretionary spending programs, the year that detailed economic records were first compiled.

We all know that a dollar doesn’t go as far as it once did – so measuring any spending over a 40 year period demands adjustment. One way to do this is to look at government spending as a percentage of the Gross Domestic Product (GDP). The chart below with data from the Congressional Budget Office (CBO) illustrates that in 1974, federal government spending under the Nixon Administration equaled 9.3% of ALL spending in the country (the GDP). Discretionary spending peaked in 1983 under the Reagan Administration at 10% of GDP. The most recent figures show that federal spending last year under President Obama fell to just 7.2% of GDP and is estimated to decline even further over the next several years.

Historically, the lowest level of discretionary government spending in the last 40 years occurred in 1999 under the Clinton Administration, and it rose steadily from 6.1% to 7.7% during the George W. Bush Administration.

The point I am trying to make is that it is important to keep federal spending in perspective. Your federal government today is spending a much smaller share than President Reagan ever did and more spending cuts are coming. Many of us think it is long past time to face reality and truly consider the future of our country. Do we want good roads? Do we want good schools? If the answer is yes, then it’s time to start paying for them.

At this point in our nation’s history, we should be investing again in our future. Our economy is improving and the federal budget has stabilized. The notion that federal spending is out of control just isn’t accurate. Take a look at the chart (or click here for a larger version) and table below, which illustrate my argument:

Discretionary Outlays Since 1974

as % of Gross Domestic Product (GDP)

Sources: Cong Budget Office; Office of Management and Budget

The Federal Deficit

We have heard a lot of talk about the federal deficit. The chart below shows the amount of the annual deficit, or in some cases, surplus, generated by the federal government. There are many ways to interpret these statistics and I would like to offer a few comments.

You can see there have been only four years since 1974 where a surplus was generated — the last three years under President Clinton and the first year under President GW Bush. One could argue that the 2001 surplus should be credited to Clinton policies — but I will leave that aside. However, it is clear that the federal government started regenerating deficits under Bush policies — most notably his first tax cut in 2001 (before the 9/11 attack). Certainly, the terrorist attacks on September 11^th and the country’s decision to engage in Afghanistan impacted the economy. However, the federal government made a conscious decision to turn away from fiscal discipline BEFORE September 11th.

One can quickly notice the impact of the 2008 economic crisis and our reaction to it. Regardless of how you might feel about the stimulus and the bailouts — at least it was clear what the short term effect would be on the federal deficit. I happen to think BOTH those actions were necessary and appropriate to save our economy from an even worse fate. Certainly the bailout should have had more teeth.

Remember though it was passed under the Bush Administration so those of us calling for more teeth were drowned out. The only choice we faced was action or inaction, and we chose action. I also believe that the stimulus should have been more targeted on creating jobs.

Unfortunately, Congress never has a choice between perfect options — it is always a choice between imperfect plans. I understand that most people have formed pretty strong opinions about the actions that the government took and I will let history decide whether those actions were appropriate.

Since the economic crisis in 2008, the federal government has been making significant and steady progress towards reducing our annual deficit. The average deficit over the 43 years covered by this table equals 3.1% of the GDP. This chart doesn’t show it, but by the end of the Obama Administration it will be below that historic average. Remember, absolute numbers like these only tell a portion of the story.

My final note on this is historic. This chart shows the deficits and surpluses under 20 years of Democratic Presidents and 22 years of Republican Presidents … good times and bad … war and peace. I think the most important measure is the change from one year to the next. Maybe we cannot achieve our goals in one year, but are we making progress? Based on this chart you can calculate that under Democratic Presidents, the deficit was REDUCED by an average of $22.3 billion each year … under Republican Presidents that Deficit has been INCREASED by an average of $44.5 billion each year. I’ll let you decide which course is the better one.