Federal Tax Rate vs. Spending

Federal Tax Rate vs. Spending

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Reagan (1981-88) with lowered tax rates could not keep federal spending growth under 5%.  By the end of Bush the Elder's term (1992) the growth in federal spending took off like a rocket.  Clinton (1993-2000) raised the marginal rate and federal spending growth dropped to 3%.  Bush Junior (2001-2008) lowered taxes leading to an out of control spending growth leading to the Big Crash of 2008 (notice precipitous drop in GDP).  Obama took the rein on January 2009 and GDP growth recovered strongly.  The latest report on expense growth stated a tiny 1.1% rate.

The following chart shows that the deficit is declining under Obama.  Notice a very high spending increase under Bush Jr (2001-08] and the surplus under Clinton (1993-2000).  It is my thought that public works programs could start bringing the deficit down further.

INFLATION-ADJUSTED DOLLARS (2012)

Why The Obama Recovery Has Been Much More Impressive Than Reagan's - Business Insider

from: Why The Obama Recovery Has Been Much More Impressive Than Reagan's - Business Insider

Why The Obama Recovery Has Been Much More Impressive Than Reagan's

Joe Weisenthal|January 30, 2012|

24,155|129

The 2012 election will revolve around the economy, and somehow Obama will have to make the case that he should be re-elected with GDP growing below historical trend, and unemployment above 8 percent.
James Pethokoukis of the American Enterprise Institute has been doing a lot of work comparing the Obama recovery to the Reagan recovery, pointing out how much more robust the latter was.
In a new post, he takes aim at the suggestion that comparing the two recoveries is somehow unfair because Obama had to deal with the aftermath of the housing bust, whereas Reagan didn't.
Pethokoukis writes:

The reality: Housing is usually a key contributor to GDP growth during the early stages of a recovery. As a 2011 St. Louis Fed analysis points out, “Somewhat surprisingly, the housing component of GDP (more formally known as residential investment) tends to be a solid contributor to GDP growth during a recovery. Historically, residential investment has contributed only about 5 percent of GDP—a small share considering the consumption component is close to 70 percent. Nevertheless  …  it can contribute substantially to the GDP growth rate for short periods of time.”

According to Commerce Department data, residential investment added 1.33 percentage points to GDP in 1983, 0.64 in 1984. By contrast, residential investment subtracted 0.11 percentage point in 2010 and 0.03 in 2011.  (See chart below.)

But here’s the thing: Subtract the housing rebound from the Reagan Recovery and GDP still grows twice as fast as during the Obama Recovery. For example, the economy grew 7.2 percent in the second full year of the Reagan Recovery. Without residential investment, it would have grown 6.6 percent vs. 1.7 percent growth in 2011, Obama’ s second full year of recovery. Score one for the Gipper … and for supply-side/Schumpeterian economics over demand-side/Keynesian economics.

The problem is that Pethokoukis is knocking over a straw man here. He's defining housing bust purely in terms of housing construction, while ignoring the real elephant in the room: The collapse in home prices, and the knock-on effects it has had on the economy. Almost nobody, when they're talking about the housing crisis, is talking about it purely in terms of residential investment (though that is one sub-area).

Lest anyone be confused about what happened, here's a look at the national House Price Index going back to 1975. As you can see, home prices didn't even notice the two early '80s recessions. They collapsed massively, however, starting late in the Bush administration.
To put it bluntly, this is A Big Deal, and a dynamic not captured at all merely looking at the residential construction's share of GDP.
The unprecedented (in post-War America) housing bust also corresponds with another thing that made this recession unique: the credit bust.
Here's a look at Consumer Credit going back to 1945. Never had the U.S. seen a meaningful decline in this measure until this current malaise.

The point here, again, is that to imagine that the key difference between the Obama recovery and the Reagan recovery is the falloff in housing construction is ridiculously narrow.
It's also worth pointing out research which shows a direct connection between household debt and deleveraging and unemployment. A study by Professors Amir Sufi and Atif Mian, which we wrote about here, uses Mastercard spending data to look specifically at what happened to unemployment in areas characterized by high home prices and high household debt before the crisis. Suffice to say, those areas got hit harder.

We also had one other thing: A financial crisis. Hopefully we don't need to put up any charts or anything to remind everyone that much of the financial system seized up in late 2008, and that we lost multiple major banks, and so on. There are at least some economists who argue that post-financial crisis economies experience unusually slow growth for years and years.
So at least right off the bat, we can easily identify some huge differences between the conditions that Obama inherited and what Reagan inherited.
But we're just getting started ...
The first, obvious, point is that soon after Reagan entered office THE U.S. WENT INTO A RECESSION!

For some reason, which we can't figure out, Pethokoukis thinks Reagan gets to start at 1983.
He writes:

Ronald Reagan inherited a Long Recession. The economy declined 0.3 percent in 1980, grew at a subpar 2.5 percent in 1981, and then plunged 1.9 percent in 1982. The lengthy downturn was really the culmination of more than a decade of bad economic policy. But the Reagan Recovery was stunning. GDP rose 4.5 percent in 1983 and 7.2 percent in 1984. It was Morning in America, and Reagan won reelection by a landslide.

If you really want an apples-to-apples comparison, it's hard to fathom why Reagan doesn't have to answer for a recession happening so soon on his watch, and why he only gets measured on those two years. What's more, as you can see in the chart above, the 1984-1988 period was pretty average, so we're really just talking about two years of really impressive morning-in-America growth.
Another thing about Reagan was that he was a deficit-lover.
Reagan presided over the largest (still) one-year annual jump in the size of the national debt. (And PS: that just happened to be right after the recession, when the economy started growing like crazy as Pethokoukis notes)

If you want to look just at annual growth of government spending, Reagan clearly had more sustained growth than Obama has had. Note that Reagan never once had a period of shrinking government spending.

Let's forget government spending though. We've already established how much Reagan loved it.
What about private investment? After all, that's the sine qua non of a strong economy, as supply siders like to argue.
Here's a look at annualized change of private spending.

Since the Recession ended, Obama has maintained growth in private investment. Reagan? He had several negative periods in there, and overall a lot more volatility on this measure. And as Pethokoukis even noted above, Obama has had to contend with weak residential investment, yet private investment is still maintaining nice growth.
We could of course go on, and point to several other factors in Obama's favor, such as the fact that tax rates had already been lowered quite a bit heading into his presidency, taking away one easy form of stimulus, or the fact that a major trading partner, Europe, has been in crisis virtually the whole time of Obama's Presidency, or the fact that Obama faced a Congress who threatened to cause the U.S. to default, or the fact that interest rates were ultra-low already, again taking away one form of stimulus from Obama.
But you get the gist: The conditions behind the Great Recession were far worse than anything Reagan inherited, and Obama has pulled off a recovery with less of a sustained growth in Federal Government spending.
It doesn't look good for The Gipper.

Washington Had a Spending Problem | Paul Kasriel | Safehaven.com

from:  Washington Had a Spending Problem | Paul Kasriel | Safehaven.com

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Washington Had a Spending Problem

By: Paul Kasriel | Tue, Jul 26, 2011

But does it have one now and through 2017? In an historical context, no. Consider Chart 1, which shows the rate of growth in the 12-month cumulative amount of total federal outlays from year-ago month. In the 12 months ended June 2011, total federal outlays are up 3.28% from 12 months ended June 2010 -well below the 6.64% median growth in this 12-month cumulative total from December 1955 through June 2011. So, Washington hardly has a spending problem now vs. history.

Chart 1

Although Washington does not seem to have a current spending problem, what about a spending problem going forward? Specifically, if the programs specified in President Obama's February 2011 budget proposal were implemented, how would growth in federal total outlays in an eight-year Obama presidential tenure compare with growth in federal total outlays of other presidents' tenures? To answer this question, I have relied on projections of total federal outlays by the Congressional Budget Office (CBO), the nonpartisan "scorekeeper" of all things fiscal. Chart 2 shows the compound annual rates of growth in total federal expenditures of presidential tenures beginning with the Kennedy-Johnson eight-year tenure. Because an incoming president essentially inherits the budget of his predecessor, I have started the growth clock in the second year of a presidency and kept it running through the first year of the next president. For example, the clock for federal outlays for President George Walker Bush started with fiscal year 2002 and ran through fiscal year 2009. Although I am not making any predictions about the outcome of the 2012 presidential election, because the CBO has projected federal outlays through what would be another full term for President Obama (and beyond) and because of claims that under President Obama's budget proposal federal spending is a "problem," I have assumed in the growth calculations another full term for President Obama. So, Obama's federal-spending clock starts with fiscal year 2010 and runs through fiscal year 2017. In the presidential terms starting with Kennedy-Johnson, growth in federal total outlays was the fastest under President Carter (JEC) with a four-year compound annual rate of growth of 13.46%. The slowest growth in federal total outlays occurred during President Clinton's (WJC) term with an eight-year compound annual rate of growth of 3.55%. Given actual fiscal year 2010 outlays and CBO projections through 2017 based on President Obama's budget proposal of February 2011, the compound annual rate of growth in federal total outlays in the eight years ended 2017 would be 3.65%, just 10 basis points above that of President Clinton's eight-year presidential tenure.

Chart 2

Lest you think that I rigged the data in favor of President Obama by assigning the total federal outlays in fiscal year 2009 to President George Herbert Walker Bush, the fact is that there were some very large federal outlays, such as those related to TARP in October 2008, that occurred prior to President Obama's inauguration in late January 2009 (see Chart 3). Bear in mind the federal government's fiscal year begins in October and ends the following September.

Chart 3

In part because of the nine consecutive federal budget deficits run starting in fiscal year 2002, cumulating to $4.84 trillion, interest on the federal debt is projected to be the fastest growing major component of federal outlays. Chart 4 shows the compound annual rate of growth of federal outlays excluding interest on the debt by presidential tenure. In the eight years ended fiscal year 2017, federal outlays excluding interest on the debt is projected to grow at a compound annual rate of 2.43%, the slowest, by far, during any presidential tenure starting with the Kennedy-Johnson presidency.

Chart 4

Although when considering CBO and anyone else's projections of federal outlays for the next several decades beyond fiscal 2017, it is correct in saying that Washington does have a spending problem, largely because of baby-boomer entitlement expenditures and interest on the debt. But looking at growth in current federal outlays and projections out through fiscal year 2017, it seems to be hyperbolic to say that Washington currently or in the next six fiscal years has a spending problem.
I appreciate the notion that presidents do not have complete control of the amount of expenditures that occur during their tenures. Although presidents submit budget proposals, Congress authorizes expenditures. So, it might be inappropriate to demarcate growth rates in federal outlays by presidential tenure. The fact (or CBO projection) remains, however, the current growth rate and projected growth rate through fiscal year 2017 in federal outlays are restrained in an historical context.

Households See Marginal Deterioration in July Job Prospects

Although the Conference Board's household survey did show an uptick of 1.9 points in overall consumer confidence in July powered by the expectations component (see Chart 5), the more important part of the survey related to labor market conditions continued to paint a dismal picture. The difference between the percentage of respondents saying that jobs were hard to get vs. the percentage saying that jobs were plentiful increased by 0.9 points in July - the third consecutive monthly increase. As shown in Chart 6, this difference tends to move in tandem with the monthly BLS unemployment rate. Although hardly the final word on the July unemployment rate, the July Conference Board household survey is not encouraging that the BLS will report a decline in the July unemployment rate.

Chart 5

Chart 6

Two Reports Show Housing Continuing to Languish

New home sales were reported to have declined by 0.95% in June, slipping to an annualized sales rate of 312 thousand units (see Chart 7). The number of new homes that were being offered for sale fell to 164,000 units (see also Chart 7), the lowest number since the inception of this series way back in January 1963! Despite the incredibly small number of new homes for sale, it took almost 10 months to "move the merchandise" in June (see Chart 8). The July home-builders survey indicated that sales activity was picking up (see Chart 9), so perhaps the July report on new home sales will reflect this.

Chart 7

Chart 8

Chart 9

The continued weakness in housing demand is reflected in the behavior of the Case-Shiller price index for home sales (including the prices of sales of existing homes) in 20 major metropolitan areas. After rising 0.44% in on a seasonally-adjusted basis, this price index retreated marginally by 0.05% in May (see Chart 10). The continued weak sales rates for houses, both new and existing, suggest that the April increase in the Case-Shiller price index was an anomaly.

Chart 10

Henry A. Wallace, The Danger of American Fascism

Henry A. Wallace, The Danger of American Fascism:

Still another danger is represented by those who, paying lip service to democracy and the common welfare, in their insatiable greed for money and the power which money gives, do not hesitate surreptitiously to evade the laws designed to safeguard the public from monopolistic extortion.
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They claim to be super-patriots, but they would destroy every liberty guaranteed by the Constitution. They demand free enterprise, but are the spokesmen for monopoly and vested interest. Their final objective toward which all their deceit is directed is to capture political power so that, using the power of the state and the power of the market simultaneously, they may keep the common man in eternal subjection.