The truth about government deficits
NEIL REYNOLDS
Globe and Mail Update
March 12, 2008 at 6:00 AM EDT
In his 2004 book, The Price of Loyalty, former Wall Street Journal writer Ron Suskind described the rise and fall of Treasury Secretary Paul O'Neill in the first two years of President
George W. Bush's turbulent first term. Mr. O'Neill advised tax increases to avert deficits. (He calculated that a 60-per-cent increase in personal income taxes was needed.) His opposition to deficit spending made him a misfit in Mr. Bush's tax-cutting administration.
In one cabinet confrontation in 2002, Vice-President Dick Cheney lectured him bluntly. “Reagan proved,” he said, “that deficits don't matter.” Weeks later, Mr. Cheney fired him.
Set beside President Ronald Reagan's peacetime deficits in the 1980s, Mr. Bush's seven successive wartime deficits (beginning in fiscal 2002) look modest. Mr. Reagan ran deficits almost twice as large – relative to gross domestic product – as Mr. Bush.
The eight Reagan deficits averaged 4 per cent of GDP; the seven Bush deficits (thus far) have averaged 2.4 per cent.
Mr. Bush would need now to run a one-year deficit of $1-trillion (U.S.) to match Mr. Reagan's largest deficit in 1983, which hit 6 per cent of GDP (when GDP stood at $3.4-trillion). The largest of the Bush deficits – $412-billion in 2004 – hit 3.6 per cent of GDP (when GDP stood at $11.5-trillion).
At 6 per cent of GDP, incidentally, the largest of the Reagan deficits exceeded the largest of Franklin Delano Roosevelt's deficits during the Great Depression, which reached pinnacles of 5.9 per cent of GDP in 1934 and 5.8 per cent of GDP in 1936.
How destructive are government deficits? How wicked?
We can compare three recent two-term administrations, two of which (those of Republicans Reagan and Bush) became notorious for budgetary deficits, one of which (Democratic President Bill Clinton) became celebrated for budgetary surpluses. When Mr. Reagan took office in January, 1981, GDP stood at $3-trillion. When he left office in January, 1989, GDP stood at $5-trillion – an increase in these eight years of 65 per cent.
When Mr. Clinton assumed office in January, 1993, GDP stood at $6.5-trillion. When he left office in January, 2001, it stood at $9.7-trillion – an increase in these eight years of 50 per cent. (In his first term, Mr. Clinton ran four deficits, which averaged 2.6 per cent of GDP, slightly higher than Mr. Bush's deficits a decade later. In his second term, Mr. Clinton ran three surpluses, which averaged 1.2 per cent of GDP.)
When Mr. Bush became president in January, 2001, GDP stood at $9.7-trillion. When he leaves office in January, 2009, it will stand (as officially projected) at $15-trillion – an increase in these eight years of 54 per cent.
You can conclude from these numbers, rightly or wrongly, that Mr. Cheney was essentially correct, that deficits don't matter – provided you generate such vigorous economic growth that GDP grows at a faster rate. The deficits of the Reagan years were the largest in these three presidencies; the economic growth was the greatest.
The crucial lesson from the Reagan era, though, arises not so much from the deficits as from the tax cuts. Without lower tax rates, the Reagan deficits would have been merely archaic exercises in Keynesian tax-and-spend. By cutting tax rates the most, Mr. Reagan produced the most economic growth.
The U.S. Tax Foundation, by the way, has calculated that the greatest of the postwar tax-cutters was actually Democratic President John F. Kennedy, whose tax cuts represented 8.8 per cent of the 1962 budget. Mr. Reagan's tax cuts represented 5.5 per cent of the 1983 budget. Mr. Bush's tax cuts represented 3.8 per cent of the 2003 budget. Using a different measure, the Kennedy tax cuts represented 1.9 per cent of national income; the Reagan tax cuts represented 1.4 per cent; the Bush tax cuts represented 1 per cent.
Canadians can look at these deficits from a different perspective. In this space last week, we examined (and admired) the federal government's resolve in paying down the national debt. We noted that Canada now has the lowest debt (relative to GDP) of any of the Group of Seven countries. One reader responded with the observation that Canada also has the lowest per-capita GDP of the G7 countries.
This is not correct, of course. Measured on the basis of purchasing power and expressed in 2007 U.S. dollars, the deficit-spending United States has the highest GDP per capita in the G7: $46,000. But debt-paying Canada has the second highest: $38,200.
The only unequivocal conclusion from all of this is that Mr. Cheney was right to fire Mr. O'Neill. A 60-per-cent increase in personal income taxes would have shut down the U.S. economy – and the Canadian economy along with it.
You can take the high road. You can take the low road. Either way, though, you have to keep the toll as low as you can.