Ed Lotterman: Keeping shutdown facts straight

October 18, 2013 

Don’t fall for romantic fables about imagined fiscal successes.

Former Sen. Daniel Moynihan once said: “Everyone is entitled to his own opinion, but not to his own facts.” But facts are often elusive, and Americans are notoriously weak on history. Thus snake oil salesmen are able to spin fables.

A prime example was when a Chicago-based financial pundit issued a piece downplaying the effects of the most recent partial government shutdown, and arguing that the one in 1995-1996 was the cause of the tenuously balanced budgets in fiscal years 1998-2001, during the Clinton administration.

The piece was from Brian S. Wesbury, chief economist at First Trust. Here’s an excerpt:

“The real result of the 1995-96 shutdown was that politicians could no longer hide the fact that government was overspending. And when politicians can’t hide, there is a political reaction. In the late 1990s, that reaction slowed government spending relative to GDP dramatically and the US eventually moved into surplus.”

A nice-sounding story, but if one takes the time to look at actual federal revenue and spending data, it becomes apparent that this is pure hogwash. As usual, tables on federal finances in the Economic Report of the President for any year after 2001 provide relevant facts on this assertion.

Remember that the Clinton-years shutdown took place three months into fiscal year 1996. The next election took place after the 1997 fiscal year had started. So any “political reaction” wrought by public concern over the Newt Gingrich-led shutdown could only have had effect on fiscal years 1997 and later. Did this really happen?

First, recognize that any government “overspending” that was taking place had been falling, relative to gross domestic product, for several years already. Outlays had hit their highest peacetime level ever during the Reagan administration, reaching 22.9 percent of GDP in fiscal 1983. But they had fallen by the end of the George H.W. Bush administration and into fiscal 1995, which ended 10 weeks before the shutdown.

That shutdown had little real effect on spending in the budget year then already underway, which came in at 19.9 percent of GDP. This was the lowest level of spending-to-GDP in 17 years.

So the trend already was down before a supposed heroic stand by the Republicans somehow opened the eyes of an electorate that had ignored deficit issues.

Second, recognize that any spending downtrend was dominated by two factors. First, defense spending fell from 5.9 percent of GDP in 1988 to 2.9 percent in 1999. And net interest on the national debt, which had hit 3.2 percent of GDP in 1991, fell to 2.5 percent by 1999.

Neither of these was driven by any Republican-driven thrift. Indeed, the biggest part of the defense spending decline took place before the GOP won control of Congress in the 1994 election. The drop in interest outlays was driven by Federal Reserve policies of lower real interest rates and the maturing of high-cost bonds issued in the high-interest early 1980s.

The catchall category of “other” spending that includes all general government operations had fallen as a percentage of GDP and even in inflation-adjusted absolute dollars from 1991 to 1997, but then started back up, precisely over the interval when this supposed “political reaction” on the part of a suddenly-informed public was forcing cutbacks. No shutdown-induced thrift here.

What really did change over the 1990s was revenue. After inflation, overall tax revenue grew by 49 percent from 1990 to 2000 and revenue from the individual income tax by 63 percent.

The last Reagan tax act had cut the top marginal rate to 28 percent for 1988. Understandably, the deficit ballooned. The Bush administration that followed requested and got the increase that edged this rate back to 31 percent for 1991, and Democratic-controlled congress gave Bill Clinton his requested rise to 39.6 percent for 1993 and later.

According to supply siders, this was going to kill the economy. Instead, adjusted for inflation, revenues from this tax rose by 35 percent in the first five years the new rates were in effect and continued to grow until the 2001 tax cuts and recession. Moreover, the economy and employment grew strongly through the 1990s.

Increased revenue played a much bigger part than slower growth of outlays in the move from a budget deficit of 4.6 percent of GDP in 1992 to a surplus of 2.5 percent eight years later. (In both cases, surpluses in Social Security and Medicare accounts obscured the true state of affairs in the rest of the budget.)

The largest single factor in our nation’s fiscal improvement in the 1990s was very strong economic growth. Some of that was driven by factors completely outside of policy, such as the burst of high-tech innovation together with the resulting rise in tech stock prices. Some resulted from increasing loose monetary policies, partly in response to the Asian financial crisis of 1997, that would lead to the disastrous asset bubble in the succeeding decade.

But the return to fiscal responsibility represented by the 1990s’ Bush and Clinton tax increases certainly contributed, not least because these demonstrated a rejection of the delusions spread by cranks and charlatans in the preceding decade.

The 1995 shutdown was a political event, not an economic one. It is preposterous to think that it somehow produced political pressures that closed a budget deficit. The numbers clearly demonstrate this cannot be true. The more we fall for fables like this, the longer it will take us to get our houses in order.

Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.

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