It’s The Economy, Stupid

This article was featured in The Bulletin (Philadelphia-area newspaper) on 6/20/10 and the Bucks County Courier Times on 8/17/10. You can read the Bulletin version here or the Courier Times version here.

The United States recently reached an ominous milestone: The national debt surpassed $13 trillion. Numbers with “illions” attached to them are thrown around so regularly that debt of this magnitude is numbingly abstract to the average American. But consider it this way: How long would it take to pay off just $1 trillion if we paid back one dollar every second? 5 months? One year? Politicians use the term “trillion” rather casually when they discuss a new national program or our mounting debt, but they never make it concrete. The answer: It would take 31,688 years to pay off just $1 trillion of the national debt if we paid off a dollar a second. Now multiply that number by 13.

Nine years ago, President Bush took office with a national debt of $5.73 trillion, a number that was rapidly shrinking following the Clinton Administration. Between 1998-2000, the publicly held debt was reduced by $363 billion—the largest three-year pay-down in American history—and President Clinton left office with a $237 billion budget surplus (debt is the accumulation of past deficits). So how has the national debt nearly tripled in the decade since?

Those on the far right will tell you we didn’t cut taxes enough. Those on the far left will say we didn’t raise taxes enough. They are both wrong. The Bush Administration saw the national debt rise 72% under its watch, and turned a multi-billion dollar surplus into a nearly half-trillion dollar deficit. The Obama Administration, in just 18 months, has grown the national debt by over 30%, and widened the deficit by nearly 300%. If President Obama truly ushered in “change,” why are the results so strikingly similar?

Because both sides shared the deadly common denominator of profligate spending. The Bush Administration embraced the philosophy of “compassionate conservatism”—focusing on select social and entitlement programs—under which its non-discretionary spending was the most since 1977. President Bush was a part-time conservative, cutting taxes but spending heavily.

President Obama doubled down on the spending habits of his predecessor. He passed the largest spending bill in U.S. history (the $787 billion so-called “stimulus”), a 2010 budget of $3.5 trillion (at the time a record high), and a 2011 budget of $3.8 trillion, marking the first ever post-World War II  budget set at 25% of GDP. This, of course, all came on the heels of a $1 trillion healthcare bill, various bailouts of large corporations, massive expansions of domestic entitlement programs, and the TARP program for Wall Street. For President Obama, spending is justified through faulty Keynesian economics and funded through redistributive taxation.

The result for both administrations has been the same: Explosion of the national debt and with it, economic volatility. That’s because massive spending, no matter what the tax policy, grows deficits.

In the 1990s, the Hoover Institution’s W. Kurt Hauser demonstrated that tax cuts and tax increases have no correlation with revenue growth or deficit reduction. According to economist David Ranson, head of research at H.C. Wainwright & Co. Economics, Hauser’s work shows that, “Changes in marginal tax rates do not make a perceptible difference to the ratio of revenue to GDP.” In other words, according to “Hauser’s Law,” tax policy in either direction cannot reduce the deficit.

So what can reduce the deficit? Hauser’s study also found an empirical link between GDP growth and revenue growth. Simply put, the only predictor of increased federal revenue is economic expansion. So, to get more revenue to reduce the deficit, government must grow the economy.

To do this, it must aggressively reduce federal spending. Harvard economist Alberto Alesina recently found that strong deficit reduction policies have been followed by large increases in GDP growth: “Spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.” That’s significant. Alesina is saying that spending reductions actually grow GDP, while Hauser’s Law demonstrates that GDP growth reduces deficits. The formula, then, is simple: Cut spending; GDP grows; revenues increase; deficits fall; the economy expands. Repeat.

Why? Because fiscal restraint does two important things: First, it allows for tax relief (when the government spends less, it can tax less). Low tax rates keep more money in the free market for investment, consumption, and spending. Second, it balances the budget by keeping spending within its means. A balanced budget creates long-term economic stability by removing uncertainty, volatile interest rates, and leveraged debt from the marketplace. That combination fuels powerful growth.

This was something the Clinton Administration (and its Republican-lead Congress) understood exceptionally well. President Clinton’s stated theory upon taking office was that growth would come through stability. Get rid of the deficit, he said, and the economy will have stable interest rates, higher bond ratings, and a strong foundation of financial certainty.

To get there, he started where his successors did not: By cutting government spending. Congress implemented a “pay-as-you-go” system that enforced strict fiscal discipline, reformed government entitlement programs to reduce waste, and reduced federal spending to its lowest level since 1966. The administration held the line on taxes to encourage investment and consumption from the private sector, placing more dollars into a dynamic capitalist economy. By doing what neither President Obama or President Bush did—shrink government, reduce spending, and moderate taxes—the Clinton Administration encouraged an economic environment that created 22 million new jobs, brought unemployment and inflation to their lowest levels in 30 years, and turned a deficit into a multi-billion dollar surplus. For all the Clinton Administration did wrong, it got the economy and deficits right.

The lesson for our leaders is clear: To reduce the deficit, you must grow the economy. To grow the economy, you must first embrace fiscal restraint. As James Carville once told then-Governor Clinton, “It’s the economy, stupid.”

-Matt Benchener is Supervisor of Newtown Township and Founder of TruPolitics.net