Point/Counterpoint on Administration Fiscal Policy
Point/Counterpoint on Administration Fiscal Policy
On December 10, Office of Managemant and Budget Director Joshua Bolten published an op-ed piece in the Wall Street Journal detailing the administration’s fiscal policy and approach to the deficit. American Progress Senior Economic Advisor Gene Sperling responds.
OMB Director Bolten: “From the left, the president’s tax cuts are blamed for driving the federal budget into deficit.”
• The critique of the administration’s deficit exploding policies has not only, or even most vocally, been from the left. A number of independent organizations including the Committee for Economic Development, the Concord Coalition, and Goldman Sachs, along with individual voices like those of former Republican Commerce Secretary Peter J. Peterson and a group of 10 Nobel Prize winning economists, have harshly criticized the long-term fiscal damage done by the President’s tax cuts.
OMB Director Bolten: “Had there not been one dime of tax relief under President Bush, the federal budget would still have run a substantial deficit in 2003.”
• This statement is not only misleading, but misses the point.
• First, to suggest that the Bush tax cuts have been only a minor factor in the fiscal deterioration we have witnessed is flat wrong. The tax cuts are the largest single contributor to the deterioration of our budget outlook, and will continue to impose huge costs in years to come – over $600 billion in 2013 alone, including interest cost.
• Second, this is an example of the Bush administration’s disciplined effort to confuse the short-term with the long term in order to justify its reckless policies. Let’s be clear: everyone agrees that running short-term deficits in order to offer well-targeted economic stimulus or national security during times of recession or war is certainly justified. But the Bush administration has used the need for short-term stimulus as cover to pass long term tax cuts that not only provide little short term support but will end up costing us trillions in coming decades.
OMB Director Bolten: “[T]he president’s tax cuts have been critical to his priority of strengthening the economy and creating jobs. Perhaps the best timed in American history, these tax cuts deserve much credit for today’s brightening economic picture: the highest quarterly growth in 20 years (8.2 percent), which, though unlikely to remain as high, is a harbinger of sustained growth to come”
• Last time we checked, President Bush has been president since January 20, 2001. Like an 0-9 football coach heading into the last couple of games of his season, this administration wants to take credit for a single quarter of growth in 2003, rather that acknowledge that in both 2001 and 2002 they missed significant opportunities to pass short-term, high bang-for-the-buck stimulus that could have jumpstarted the economy far earlier.
• In 2001, the administration offered no direct stimulus in their initial tax cut package that would have taken effect during the recession. The administration came around to including a partial advance on the lowest rate reductions, which was inspired by calls for a fast-acting tax rebate that would put money in the hands of Americans in 2001. Yet since the administration insisted that the advance be non-refundable, it left out the 34 million low-income taxpayers with the highest propensity to spend.
• In 2002, with our economy in desperate need of a jumpstart, the administration stalled stimulus negotiations by pushing the retroactive elimination of the corporate alternative minimum tax (AMT), a provision which would have provided a $254 million tax break to Enron. For the second year in a row, the administration missed an opportunity to pass a bipartisan stimulus package with a rebate during the critical holiday season.
• Even the 2003 tax cut is more of a vindication of progressive policies that an example that the administration’s tax cut agenda has been at all effective in stimulating the economy. Overall, the economic consulting firm Economy.com found that the tax cuts were responsible for only 13 percent of the growth last quarter – meaning that we still would have seen GDP growth of about 7 percent without the tax cut. But even the modest contribution of the tax cut was predominantly due to its short-term, targeted components – the child tax credit and the bonus depreciation for business investment – that progressives have always supported. Even if one generously assumes that the tax cuts added $30 billion to the economy in the third quarter, it would hardly be justification for passing two tax cuts that if made permanent could cost more than $3 trillion over the coming decade.
• Imagine if President Bush had called together Republicans and Democrats two-and-a-half years ago and asked for a bipartisan commitment to enact significant short-term, targeted stimulus policies alongside a commitment to longterm fiscal discipline. We could have seen a return to job growth far earlier without undermining confidence in our long term fiscal situation.
OMB Director Bolten: “[J]ob growth, which typically lags recovery, should continue to strengthen in the months ahead.”
• Director Bolten may be right that job growth typically lags other indicators in a recovery, but the persistence of this recovery’s job loss far exceeds the norm.
• The first two years of this recovery – from November 2001 when the recession officially ended to October 2003 – had the worst job loss of any first two years of a recovery since the Great Depression.
• Following such historic job loss – nearly 3 million private sector jobs since the recession began – we need robust job growth to not only provide jobs for the population-driven expansion in the labor force but also for all of those who have lost their jobs. Currently the average length of unemployment is at its highest rate since 1984, and, as American Progress Senior Economist Christian Weller has pointed out, there are 7.9 million fewer jobs than there should be given the typical employment growth in recoveries since the 1960s.
• The modest job gains we have seen over the past four months are far from robust, and are indeed anemic compared to previous recoveries. If we assume that monthly job growth picks back up to October’s level of 137,000 new jobs (despite having fallen to 57,000 in November), and that we are able to sustain that rate for the entire year through October 2004, it would still end up being the worst third year of a recovery since 1958.
OMB Director Bolten: “The increases in all other discretionary accounts have been modest by historical standards. In the last budget year of the previous administration (FY ’01), domestic spending unrelated to defense or homeland security grew by an eye-popping 15 percent. With the adoption of President Bush’s first budget (FY ’02), that number was reduced to 6 percent; then 5 percent the following year; and now 3 percent for the current fiscal year.”
• This comparison leaves out the fact that nondefense discretionary spending declined substantially as a share of our economy under President Clinton. During Clinton’s second term – a period when some feared the appearance of surpluses would create great pressure to increase spending – nondefense discretionary spending averaged 3.3 percent of GDP, compared to 3.8 percent under President Reagan, 3.7 percent under the first President Bush, and 3.7 percent in the last two years, due in large part to increases in international aid and homeland security.
• Spending restraint alone will not be enough to close the hole that the administration’s policies are blowing in the budget. According to an analysis by the Committee for Economic Development, the Concord Coalition, and the Center on Budget and Policy Priorities, eliminating deficits of the magnitude we will be facing through spending reductions alone would require cutting Social Security by 60 percent, defense spending by 73 percent, or all programs outside defense, homeland security, Medicare, and Social Security by 40 percent.
OMB Director Bolten: “[W]e still face a deficit in the $500 billion range for the current fiscal year – larger than anyone wants. But that size deficit, at roughly 4.5 percent of GDP (compared with a modern peak of 6 percent during the Reagan years), is not historically out of range; and it is entirely manageable, if we continue the president’s strong pro-growth economic policies and sound fiscal restraint.”
• We concede that a deficit of 4.5 percent of GDP would not be the largest we have faced since World War II as a percent of GDP. The administration has the bragging rights of presiding over only the sixth worst deficit in the last 57 years by that measure. But referring to such a deficit as “manageable” misses a couple key points:
• The only reason the deficit is 4.5 percent of GDP is because the commitment to fiscal discipline and saving surpluses for Social Security in the 1990s put us in a position to respond to the double whammy of a recession and Sept. 11, 2001 with strength. Had the Clinton administration adopted a policy of tolerating 4.5 percent of GDP deficits, rather than leaving office with a projected surplus of 3.3 percent of GDP in 2004, the fiscal deterioration we have experienced over the past three years would have left us with historically unprecedented deficits in excess of 12 percent of GDP.
• On the verge of the baby boom retirement and facing new unknown costs of homeland security, our standard should not be to simply ensure that deficits do not get as bad as the worst years of the 1980s – one of the worst fiscal decades of the last century. In 2008, the year the first baby boomers begin retiring, we are projected to be $6.2 trillion deeper in debt – the equivalent of $84,000 for every family of four – than we were projected to be when President Bush took office. Our nation had worked its way out of its deficit problem in the 1990s through tough choices, a bipartisan commitment to fiscal responsibility, and a pay-as-you-go approach to any new entitlement or tax cut initiatives — a policy the current administration has abandoned.
OMB Director Bolten: “Indeed, with adoption of the president’s policies, our projections show a solid path toward cutting the deficit in half, toward a size that is below 2 percent of GDP, within the next five years.”
• Even assuming a solid expansion, independent assessments from Goldman Sachs and the Committee for Economic Development and Concord Coalition, based on more realistic budget projections, are forecasting deficits of $400 – $600 billion or about 3 to 4 percent of GDP for the entire decade.
The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.