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President Bush, the Federal Budget, and Deficits

By Richard Kogan 815 South 25th Street, Arlington VA Introduction. This memo examines Introduction page 1 recent US Federal budgets, both during the The budget deficit for 2004 page 2 Bush administration and in historical context. What is a "big" deficit? page 3 The figures in this memo suggest, at least to Historical perspective on deficits page 4 me, that 1) budget policy under Bush has been Taxes or spending? page 5 less effective than it should have been in How about the wars? page 7 assisting the economy, and 2) budget policy is How about the recession? page 7 producing large budget deficits, which are The economy, income, and jobs page 7 more likely to harm than help the economy in But tax cuts help me, don't they? page 9 the long run. I'd be pleased if you read this Bush should have done better page 10 memo, examine the data, and reach your own conclusions. If the text is boring, please just examine the data, which may speak for itself. The data show that over the last four decades, Republican presidents have not done particularly well with either the budget or the economy. By contrast, Democratic presidents have routinely or invariably done better: lower deficits, greater economic growth, faster job creation, and fewer recessions, for example. Solid, factual information about the budget and the economy can be hard to get; even though much information is publicly available, you have to know where to look. I do, because I have been employed as an analyst of the federal budget for the last three decades.1 The budget figures in this memo are entirely from official government sources, so the data are prepared by civil servants in the employ of Republican appointees. I'll cite the sources in the endnotes (lowercase Roman numerals) so you can check my arithmetic for yourself. Let me be clear ­ the numbers are not, or should not be, in dispute. If you don't like the budgetary or economic results, you can vote Democratic (my recommendation), or decide you are voting for Bush for reasons other than his budgetary policies. But you cannot reasonably challenge the facts.

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Exhibit 1a The dozen largest deficits of the last nine administrations (42 years, fiscal 1962-2004) Year* Deficit (a) Deficit (b) President Reagan 1983 6.0% 35% Reagan 1985 5.1% 29% Reagan 1986 5.0% 29% Reagan 1984 4.8% 28% Bush 1 1992 4.7% 27% Bush 1 1991 4.5% 26% Ford 1976 4.2% 25% Reagan 1982 4.0% 22% Bush 1 1993 3.9% 22% Bush 1 1990 3.9% 21% Bush 2 2004 3.6% 22% Bush 2 2003 3.5% 21%

* the federal fiscal year. Fiscal years start on the previous October first; fiscal 2005 has already started. Because Congress enacts appropriations bills and other budget legislation in the fall, for the coming fiscal year, the budgets for a fiscal year must be attributed to the President and Congress that was in power in the prior calendar year. (a) as a percent of GDP (b) the percent by which expenditures exceed revenues

My employer is non-partisan; the opinions in this memo are purely my own.

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Exhibit 1b The dozen smallest deficits / largest surpluses of the last nine administrations (42 years, fiscal 1962-2004) President Year* Deficit (a) Deficit (b) Clinton 2000 -2.4% ** -12% ** Clinton 1999 -1.4% ** -7% ** Clinton 2001 -1.3% ** -6% ** Clinton 1998 -0.8% ** -4% ** Johnson 1969 -0.3% ** -2% ** Johnson 1965 0.2% 1% Clinton 1997 0.3% 1% Nixon 1970 0.3% 1% Nixon 1974 0.4% 2% Johnson 1966 0.5% 3% Kennedy 1963 0.8% 4% Kennedy 1964 0.9% 5%

* the federal fiscal year ** surplus (a) as a percent of GDP (b) the percent by which expenditures exceed revenues

Exhibit 1c Average deficits of the last nine administrations, from smallest to largest (42 years, fiscal 1962-2004) President Deficit (a) Deficit (b) Clinton 0.1% 1% Johnson 0.9% 5% Kennedy 1.0% 6% Nixon 1.2% 7% Carter 2.4% 13% Bush 2 2.9% 17% Ford 3.5% 20% Bush 1 4.2% 24% Reagan 4.3% 24% Democrats 0.9% 5% Republicans 3.3% 19%

* the federal fiscal year (a) as a percent of GDP (b) the percent by which expenditures exceed revenues

The Budget Deficit for 2004. The deficit for fiscal year 2004 (which ended on September 30) is $413 billion.2 Just four years ago, in 2000, the government ran a surplus of $236 billion.i The administration prefers to measure deficits, debt, spending, and other budget figures as a percentage of the economy (gross domestic product, or GDP). Otherwise, the Bush deficits would appear to be the biggest in history and Bush spending levels would be the highest in history. Measuring budget totals as a percent of GDP is fair because it automatically takes into account the fact that the value of the dollar changes considerably over time, as does the nation's population and per-person income. But even when we use the administration's preferred approach (and mine) of measuring deficits as a share of GDP, we see that the Bush record is bad. · · 2004 is the fourth straight year of fiscal deterioration, the first time this has occurred since WWII. The deficit increased in 2004 even though the recession officially ended in November 2001. This seems to be the first time in US history that deficits have continued to grow this far into a recovery.

I measure deficits the same way the Office of Management and Budget (OMB), the Congressional Budget Office (CBO), and the Government Accountability Office (GAO) do ­ as the annual net cash flow between the government and the public for all federal programs. There is a strong intuitive case, however, for excluding the trust funds, and especially the Social Security trust fund. It would take another document to explain why I, most budget analysts, and all economists prefer to look at the government as a whole rather than to separate out the trust funds. However, if you do exclude the trust funds from the measurement of the surplus, then recent deficits and especially the Bush 2 deficits would be noticeably higher than displayed here.

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The Bush record is comparable to the record of recent Republican presidents. Democratic presidents do much better. · · · · Of the dozen largest deficits in the last 42 years, all twelve have occurred under Republican presidents. {Exhibit 1a} The budget has been balanced five times in the last 42 years ­ each time under a Democratic president. {Exhibit 1b} Of the dozen smallest deficits in the last 42 years (including the five surpluses), all but one occurred under a Democratic president. {Exhibit 1b} On average, deficits under Republican presidents have been 3.7 times as large as deficits under Democratic presidents. {Exhibit 1c}

What Is a "Big" Deficit? What is the difference between a big and a small deficit? One approach is to express the deficit as the percent (rather than the dollar amount) by which expenditures exceed revenues in a given year. If expenditures are 1% or 2% above revenues, that might be "small" -- the result of minor estimating problems. By this standard, the average Democratic "overspending" is 5%, which could raise eyebrows. But the average Republican "overspending" is 19% -- a big miss. {Exhibit 1c} A more precise approach is to define a big deficit as one that causes the debt to grow faster than the nation's income, while a small deficit allows the debt to grow more slowly than the nation's income.3 Debt is not free; people lend money to the Treasury in return for a guarantee that they will be repaid on time, in full, with interest. A growing debt means growing interest payments (although that fact can temporarily be obscured when interest rates are falling, as during a recession). When deficits are small, the debt grows more slowly than the economy; debt service (interest costs) will be a shrinking burden on the nation's income. But when the debt grows more quickly than the economy, it will be a growing burden; each year, a higher share of the nation's income will have to be paid as taxes to the Treasury so

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Exhibit 2 Has the debt burden increased or decreased? Debt growth relative to economic growth during the last nine administrations Change in Debt growth minus President debt/GDP(a) GDP growth (b) Johnson -2.1 % pts -6.3 % pts Clinton -2.0 % pts -5.0 % pts Kennedy -1.6 % pts -3.9 % pts Nixon -1.1 % pts -4.1 % pts Carter -0.5 % pts -1.9 % pts Ford 1.3 % pts 5.3 % pts Bush 2 1.5 % pts 4.4 % pts Reagan 1.8 % pts 5.9 % pts Bush 1 2.2 % pts 5.1 % pts Democrats -1.7 % pts -4.5 % pts Republicans 1.2 % pts 3.3 % pts

(a) average annual increase in debt/GDP ratio, in percentage points. (b) average annual growth rate of debt minus average annual growth rate of GDP, in percentage points.

When the government runs a surplus in a given year, the outstanding debt is automatically reduced; when it runs a deficit, the Treasury must borrow more, so the outstanding debt grows. In other words, the debt (currently about $4 trillion) is the net of all prior surpluses or deficits since the US was founded, and each year's deficit is simply added to the current debt.

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that the Treasury can pay rising interest on the debt. The extra taxes will not go for education, roads, defense, Medicare, or other public goods and services. Credit markets will let people or nations run small deficits forever. But increasing your borrowing faster than you increase your income -- running big deficits -- leads to bankruptcy, for people or for nations. · Over the last nine administrations, each Democratic administration has run small deficits: the debt has grown more slowly than the economy, and so debt has shrunk relative to the economy. All Republican administrations except one have run large deficits, causing the debt to grow faster than the economy. In short, Republicans finance their preferred budget policies by increasing the burden on future generations. Democrats decrease that burden. {Exhibit 2}

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. How Big Are the Exhibit 3 Bush Deficits, in Historical Deficits in Relation to the Size Perspective? As of the Econom y noted, the Bush deficits are large -- they require an increasing share of the nation's income to be devoted to debt service rather than productive private or public uses. By definition, they are unsustainable. The Bush administration points out that his deficits are not as large as those in the 1980s. This is true, but is a very low standard. Exhibit 3 illustrates some key points.ii

8% 6% 4% 2% 0%

Civil War World War I

Great Depression

World War II

Deficit

War of 1812

Percent of GDP

Surplus

-2% -4% -6% -8%

With the notable exceptions of America's major wars and economic recessions, historically the nation has maintained small deficits as a percent of GDP, or surpluses. (A small deficit is one that allows the debt to grow slower than the economy, so that debt is a shrinking burden on the credit markets and interest costs are a shrinking burden on the Treasury. Small deficits could be maintained forever; large ones could not be.). However, in the 1980's, for the first time deficits remained large even while the economy grew at a normal rate. And in the future, high, unsustainable deficits are projected in times of peace and prosperity.

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Effect of Post-War Economic Recessions

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Over the nation's history, no President ever ran large deficits other than during recessions or major wars -- until the 1980s. The budget shifted from a surplus in 2000 to deficit in 2004, a budgetary reversal of 6% of GDP in only four years. Greater four-year deteriorations occurred only during the Civil War, WWI, and WWII. Even the Great Depression, with its 25% unemployment rate, showed only a 6%-of-GDP deterioration.

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The only reason the Bush deficits are not larger than the deficits of the 1980s is that Bush assumed office with a historically large surplus already in place. Republican presidents of the last two decades are different from their Republican predecessors. Previously, Republican presidents would strive for and achieve small deficits or balanced budgets. (John Eisenhower, the President's son and a life-long Republican, recently endorsed Sen. Kerry largely for this reason.)

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Exhibit 4 Average revenue collections (as a percent of GDP) during the last nine administrations, lowest to highest Income Payroll & Total President taxes (a) other taxes revenues Bush 2 9.0% 7.9% 16.9% Kennedy 11.5% 6.2% 17.6% Ford 10.4% 7.3% 17.7% Bush 1 9.5% 8.2% 17.7% Nixon 11.0% 7.0% 18.0% Reagan 9.8% 8.2% 18.0% Johnson 11.6% 6.4% 18.0% Carter 11.2% 7.6% 18.8% Clinton 11.2% 8.3% 19.4% Republicans 10.0% 7.8% 17.7% Democrats 11.3% 7.3% 18.7%

(a) individual and corporate. Rows may not add to total due to rounding.

It should also be noted that in just a few years, the first baby boomers will start to retire on Social Security and then Medicare, and the budget will come under much greater pressure. The nation should be running down the debt before the baby boomers retire (just as it is prudent to pay off your mortgage before you retire). In fact, that is what Bush promised to do during the 2000 campaign. Instead of eliminating debt, as he promised, he has increased it.

Taxes or Spending? Large deficits may not add due to rounding. can come about because of a low level (a) Program spending excludes interest. I show interest of revenues, a high level of program separately since it is a function of debt, which is dependent in funding, or both. "High" and "low" part on the amount of debt built up (or run down) by prior can be measured relative to your policy administrations. I rank administrations by program spending, preferences, but that is entirely although total spending and total revenues determine the deficit. subjective. "High" and "low" can also be measured relative to historical averages. For instance: ·

Exhibit 5a Average expenditures (as a percent of GDP) during the last nine administrations, highest to lowest Program Interest Total spending(a) payments spending President Ford 19.6% 1.5% 21.1% Reagan 19.3% 2.9% 22.3% Carter 19.3% 1.9% 21.2% Bush 1 18.8% 3.2% 21.9% Bush 2 18.2% 1.5% 19.7% Nixon 17.8% 1.4% 19.2% Johnson 17.6% 1.3% 18.9% Kennedy 17.4% 1.3% 18.6% Clinton 16.8% 2.7% 19.5% Republicans 18.8% 2.3% 21.0% Democrats 17.6% 2.0% 19.6%

I mentioned that the budget had deteriorated -- gone from surplus to deficit -- by 6.0% of GDP over the last four years, a very large amount by historical standards. Of that 6.0% of GDP, one-fourth or 1.4% of GDP comes from an increase in expenditures. That amount

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equals about $163 billion, which is lot but does not explain the 2004 deficit of $413 billion deficit. · Total expenditures rose to 19.8% of GDP in 2004; although this is an increase, the resulting level is less than the average of 20.4% of GDP over the last nine administrations (42 years). In contrast to the expenditure increase of 1.4% of GDP from 2000 to 2004, revenue collections have fallen 4.6% of GDP over the past four years, accounting for three-fourths of the swing from surpluses to deficits. Only once before in US history, when taxes were cut after the end of WWII, have revenues fallen this sharply. By 2004, revenues fell to 16.3% of GDP. This is 1.9 percentage points below the average of the last 42 years. It is the lowest level since 1959, before Medicare, Medicaid, nutrition programs, and most federal aid to education, and when Social Security was only half as costly (as a share of GDP) as now.

·

Exhibit 5b The dozen largest spending levels (percent of GDP) of the last nine administrations (42 years, fiscal 1962-2004) Program Total President Year* spending (a) spending Reagan 1983 20.9% 23.5% Reagan 1982 20.5% 23.1% Carter 1981 19.9% 22.2% Ford 1976 19.8% 21.4% Ford 1975 19.8% 21.3% Carter 1980 19.8% 21.7% Reagan 1985 19.7% 22.8% Reagan 1986 19.4% 22.5% Reagan 1984 19.3% 22.1% Johnson 1966 19.2% 20.5% Ford 1977 19.2% 20.7% Carter 1978 19.1% 20.7%

* the federal fiscal year. (a) Program spending excludes interest.

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Exhibit 5c The dozen smallest spending levels (percent of GDP) of the last nine administrations (42 years, fiscal 1962-2004) Program Total President Year* spending (a) spending Johnson 1965 15.9% 17.2% Clinton 2000 16.1% 18.4% Clinton 1999 16.1% 18.6% Clinton 1998 16.4% 19.2% Clinton 2001 16.5% 18.6% Johnson 1966 16.6% 17.8% Clinton 1997 16.6% 19.6% Clinton 1996 17.1% 20.3% Kennedy 1964 17.2% 18.5% Nixon 1974 17.2% 18.7% Kennedy 1963 17.3% 18.6% Nixon 1973 17.4% 18.7%

* the federal fiscal year.

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Revenues are below the 42(a) Program spending excludes interest. year average solely because of reduced revenue collections from individual and corporate income taxes. These are the progressive taxes -- the ones that have higher effective tax rates for wealthier people. In contrast, collections from regressive taxes such as the payroll tax and the gasoline tax are equal to their 42-year average. (Three-quarters of American households now pay more in payroll taxes than in income taxes.) -6-

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In 2003 and 2004, revenue collections from individual and corporate income taxes fell to their lowest levels since 1942.

While revenue collections under the Bush administration have fallen fast and far, it will probably not surprise you to learn that Republicans typically collect less revenue than Democrats, although Republicans collect more of the regressive, middle-class taxes such as the payroll and gasoline tax. {Exhibit 4} You might be surprised to find out that Republicans also spend more than Democrats, on average. This is a simple fact, though I am willing to wager that most people think the opposite. See Exhibits 5a, 5b, and 5c. The Republican combination of higher expenditures and lower revenues explains why their deficits are much higher than deficits under Democrats. How About the Wars? I noted above that spending had increased by 1.4% of GDP from 2000 to 2004, an amount equal to $163 billion in 2004. Of this amount, I believe about $70 billion is for Iraq and Afghanistan (in total, about $150 billion has been appropriated explicitly for those wars and reconstruction, but not all that amount has been spent and in any case that amount has been appropriated over the course of two years). Thus, the wars explain only a fraction of the $413 billion deficit for 2004. Likewise, the wars explain less than half the overall spending increase (as a share of GDP) since 2000. Much but not all of the rest of the spending increase has been for other Defense Department programs, and also for "homeland security." How About the Recession? Another possible explanation for the high deficit in 2004 is the recent recession. Recessions increase budget deficits temporarily in two ways. First, recessions cause a dramatic drop in revenues, even when measured as a share of GDP -- during recessions, revenues decline more rapidly than the economy. Second, recessions cause some temporary increases in expenditures, especially for unemployment compensation but also for Medicaid and food stamps, as people lose their jobs and fall into poverty.4 While the recent recession was a reality, its budgetary effects should not be exaggerated. President Bush says "the economy is good and getting better." If so, the recession might explain budget deterioration in 2001 and 2002. But the deficits have kept growing into 2003 and even 2004. As noted, never before in US history have deficits continued to grow this far into a recovery. In September, CBO estimated that $47 billion of the 2004 deficit is attributable to the fact that the economy is still not fully recovered from the 2001 recession.iii This $47 billion does not explain a 2004 deficit of $413 billion. The Economy, Income, and Jobs. Early in his administration, President Kennedy said, "A rising tide lifts all boats." His hope was that a growing economy would be good for all -- it would provide more jobs, lift people out of poverty, help the struggling working class move into the middle class, increase profits for small and big business alike, and so on. Unfortunately, that hope

In addition, even if spending trends were steady in a recession, the fact the GDP is temporarily depressed means the ratio of expenditures to GDP increases temporarily during a recession.

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is not always fulfilled. Currently, economic growth overwhelmingly helps those who are already doing well, and does far less for everyone else. Exhibits 6a, 6b, 7, and 8 show that the economy regularly does better under Democrats than Republicans.iv Specifically:

Exhibit 6a Per-person economic growth under the last nine administrations Growth rate (a) President Johnson 4.0% Kennedy 2.6% Clinton 2.5% Reagan 2.5% Nixon 2.4% Carter 2.1% Bush 2 1.6% Bush 1 0.9% Ford 0.5% Average 2.3% Democrats 2.8% Republicans 1.8%

(a) average annual real GDP growth per person

Exhibit 7 Per-person wage and salary growth under the last nine administrations Growth President rate (a) Johnson 4.5% Clinton 2.4% Nixon 2.2% Kennedy 2.1% Reagan 1.8% Carter 0.3% Bush 2 -0.5% Bush 1 -0.7% Ford -1.3% Average 1.5% Democrats 2.4% Republicans 0.7%

(a) average annual real wage and salary growth per person

Exhibit 8 Per-person job growth under the last nine administrations Growth President rate (a) Johnson 2.5% Carter 2.2% Nixon 1.4% Clinton 1.2% Reagan 1.0% Ford 0.2% Kennedy -0.1% Bush 1 -0.4% Bush 2 -1.0% Average 0.9% Democrats 1.5% Republicans 0.4%

(a) average annual real wage and salary growth per person. The rankings would be almost identical (and Bush 2 would still be last) even if the growth rate of the population were not taken into account.

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The broadest measure of the economy, GDP, has grown 1.6 times as fast under Democrats as Republicans.5 On average, the economy has grown 2.3% per Exhibit 6b person per year over the last nine Dates of recessions during the last nine administrations, 2.8% under Democrats and administrations 1.8% under Republicans. Economic growth End (a) President Start under the Bush administration, at 1.6% per Dec 1969 Nov 1970 Nixon person per year, is not the worst, but is below Nov 1973 Mar 1975 Nixon/Ford even the Republican average. {Exhibit 6a} Jan 1980 July 1980 Carter Republican presidents are far more likely to suffer recessions than Democratic presidents. Source: National Bureau of Economic Research Specifically, during the last nine (a) The end date is the month in which the administrations, there have been six economy stops shrinking; it is not when the recessions, five of which have occurred under economy has regained its normal strength Republican presidents. {Exhibit 6b} And during the last half-century, there have been eight recessions, seven under Republicans.v

July 1981 July 1990 Mar 2001 Nov 1982 Mar 1991 Nov 2001 Reagan Bush 1 Bush 2

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In measuring the economy, I express it as adjusted for population growth and inflation, i.e. as real GDP growth per person.

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A different way to measure the economy is to look at wages and salaries. To the extent that economic growth is concentrated in business profits or siphoned off into increased health insurance costs, it does not increases wages and salaries. For the vast majority of us, wages and salaries determine our standard of living. Exhibit 7 shows that wages and salaries (real wages and salaries per person) grow almost four times as fast under Democrats as Republicans. Another way to look at the economy is to examine job growth. This measure is especially important for those who have lost their jobs or are at serious risk of doing so. (For those who have little or no M ore Than 30 M onths Into the Econom ic Recovery, Job G row th Rem ains Far Below the Historical Average employment (Em ploym ent Through August 2004) Percent Change from Trough worries in good 9 times or bad, it 8 is probably 7 Average of Previous Post W orld W ar II Cycles more important 6 5 to look at wages 4 and salaries.) 3 Exhibit 8 shows 2 that job growth Early 1990's 1 is almost four 0 times as rapid Current -1 under Democrats as Months Note: The "trough" m arks the end of a recession and the beginning of an econom ic expansion. The econom ic under cycles used here are as designated by the National Bureau of Econom ic Research. Source: Chart 1 in Erica L. Groshen and Sim on Potter, "Has Structural Change Contributed to a Jobless Recovery?," Republicans. Federal Reserve Bank of New York, August 2003. Updated by the Center on Budget and Policy Priorities. By this measure, the Bush administration is solidly entrenched in last place; you probably already knew that. The above graph shows that job shrinkage during the most recent recession was no worse than usual during recessions, but that the economic recovery has produced a dismal record of job recovery.

Trough 2 4 6 -8 -6 -4 -12 -10 -2 8 10 12 14 16 18 20 22 24 26 28 30 32

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Presidents do not deserve all the credit they get when the economy, wages, and job growth are good, just as they do not deserve all the blame when they are bad. But the evidence of the past nine administrations is indisputably clear, whether we are looking at recessions, economic growth, wage growth, or job growth -- the country wins under Democrats. Even though luck plays a part, sooner or later the facts speak for themselves. But Tax Cuts Help Me, Don't They? "I do better with slower growth but lower taxes than with higher growth but higher taxes ­ I'm still better off under Republicans." Well, no, you're not. The CBO has analyzed pre-tax and after-tax income for each year from 1979 through 2001.vi (The IRS and Census take a long time to make data available, which is why 2001 is the latest year covered by CBO.) Exhibit 9 shows after-tax incomes for the periods 1980-2000, the Reagan, Bush 1, and Clinton administrations. This exhibit shows that in every income class, even the top fifth of the income spectrum, the growth of after-tax income was faster under Clinton than under Reagan, and

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far faster than under Reagan and Exhibit 9 Bush combined. You will recall that Average annual growth of after-tax household income Reagan cut income taxes Reagan substantially, especially for the well Reagan Bush 1 & Bush Clinton off (and ran big deficits, as -0.6% 1.2% 0.0% 1.5% Bottom 20% previously noted); in contrast. nd 0.0% 0.7% 0.2% 1.8% 2 20% Clinton raised income tax rates 0.7% 0.1% 0.5% 1.5% Middle 20% substantially on the very-well-off, 1.3% 0.1% 0.9% 1.8% 4th 20% though not for others. Yet under 3.6% -0.7% 2.1% 3.8% Top 20% Clinton, rapid income growth for the 2.0% 0.1% 1.3% 2.7% Average well-off more than compensated for Note: the figures in this table combine the effects of what happens the effect of higher tax rates on the to incomes and what happens to tax policy. well off, as Exhibit 9 shows. Voting for a better economy is generally a more effective way of prospering than voting for lower tax rates; this is especially the case among people of ordinary means.6 Bush should have done better. Recently, "Economy.com," a firm of business consultants, issued an analysis concluding that the Bush tax and spending policies were, as a matter of economic policy, well timed but badly designed. I can do no better than excerpt at length from this analysis.vii Exhibit 10 is taken directly from the analysis.

"The purpose of this article is to assess the economic efficacy of fiscal policy during the Bush presidency. ... The economy has struggled during the Bush presidency. Real GDP has expanded, but only slowly ... This is one of the weakest performances during any presidential term since World War II. Indeed, this is the slowest top-line growth aside from that experienced during the second Eisenhower term in the late 1950s and Bush senior's term in the early 1990s. ... The growth in real GDP has not been sufficient to forestall substantial job losses. ... No other President since World War II has suffered outright job declines during their (sic) term. ... The average duration of unemployment remains at close to five months, which, save for a brief period in the depths of the severe early 1980s recession when unemployment soared to over 10%, is the longest unemployed workers have had to look for work before finding a new job since the Great Depression. ... Weighing on incomes has been weak labor compensation growth. Total labor compensation as a share of national income is currently as low as it has been since the mid-1960s and wages and salaries as a share of income has never been lower. ... [R]ising household values have not been able to offset the impact of still lower stock values and rapidly rising household debt loads. ... Personal bankruptcy filings, mortgage foreclosure rates, and delinquency rates on manufactured housing loans and credit cards are all at or just off record highs. "There is an argument to be made that the economy has suffered through a series of massive shocks during the Bush Administration... The economy has been subject to enormous shocks in the past, however [under other administrations], including free-falling stock prices, debilitating credit crunches, global financial crises, and conventional and cold wars.

Exhibit 9 also shows that Kennedy's goal of having a rising tide lifting all boats was closer to being achieved under Clinton than under the Reagan/Bush administration, but that in each case, after-tax income become more unequal over time. (Pre-tax income inequality grew even more rapidly than after-tax income inequality.)

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"The economy has benefited from the fiscal policies implemented during the Bush presidency, but only because of their sheer magnitude. The economic bang for the buck from these policies, or economic stimulus provided for a given dollar of lost tax revenue or increased spending, has been substantially lacking.

[RK: See Exhibit 10, which shows that most of the costly tax/stimulus provisions of the last three years have very low bang for the buck.]

Exhibit 10 Economic Efficacy of Bush Fiscal Policies Near-term % of 2001, 2002, and 2003 economic bang costs tax/stimulus legislation for the buck (a) (b) Emergency 1.73 2% unemployment benefits* 10% income-tax bracket 1.34 25% State government aid* 1.24 3% Child tax credits 1.04 8% "Marriage penalty" 0.74 5% Alternative minimum tax 0.67 3% Marginal tax rate cuts 0.59 19% Business investment 0.24 26% write-offs Dividends ­ capital gains 0.09 4% Estate tax 0.00 2%

This is evident from the (a) Dollar of economic growth for every dollar of lost tax massive swing from fiscal revenue. Source: Zandi (Economy.com), op cit. surplus to deficit in the past (b) I calculated the "% of total cost" column from official four fiscal years. While this cost estimate of the tax cuts prepared by Congress's Joint nearly $700 billion swing Committee on Taxation. The totals add to less than 100% amounts to nearly two because Zandi did not calculate the bang-for-the-buck of a number of minor tax provisions, but the likely bang-for-the percentage points of per buck of those omitted provisions is near zero because they annum real GDP, it has are savings incentives. generated economic growth * Opposed by the Bush administration of just over one-half that. ... Mitigating the economic efficacy of the president's fiscal policies is that a majority of the benefits going to taxpayers have gone to high income and high net worth households. More than one half of the tax benefits under the 2001 tax cut, for example, have accrued to the no more than 3% of taxpayers earning over $200,000 in annual taxable income. ... The near-term economic bang for the buck of reducing personal marginal tax rates ... is only 59 cents for every dollar of lost tax revenue... [L]ess than one-half of any tax benefit to households with incomes above the median are spent within one year... This compares to nearly 90% for households with incomes below the median. ... [T]he creation of a new 10% income tax bracket and the child tax credit rebate ... has (sic) provided a significant economic boost. The near-term economic bang for the buck of both is over a dollar. "The reduction in tax rates on dividend income and realized capital gains, a policy vigorously advocated by the President, also has only a small near-term economic bang for the buck. "Other aspects of the fiscal policies adopted during the president's term have been more economically efficacious. The provision of emergency federal unemployment insurance benefits and larger grants-in-aid to state government have been particularly potent policies as they put cash in the hands of financially pressed

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households who likely immediately spent it.7 These were only minor parts of the adopted policies, however. "[I]f a package of fiscal policy steps [had been] taken soon after 9/11 that were substantial, but temporary, and designed to get the most significant bang for the buck, the economy would not have avoided the 2001 recession, but the ensuing recovery would have been significantly more robust.

Wall-Street Bond Traders for Kerry?

The following is excerpted from a recent analysis by the Wall Street investment firm Goldman Sachs. It does not constitute an endorsement by any means; GS would like both candidates to propose significantly cheaper policies. But GS clearly believes Senator Kerry would run lower deficits than President Bush, a course they approve of.

"Even though the budget numbers do not add up for either side, we view Senator Kerry as likely to be more credible in terms of deficit reduction for four reasons: "1. President Bush's record undermines his credibility as a deficit hawk. Not only has President Bush presided over the greatest fiscal deterioration since World War II, he has made little explicit effort to enforce fiscal discipline. For example, real discretionary domestic spending has grown at a rapid pace during his first term, even when the costs of homeland security are excluded, and President Bush has not vetoed any spending legislation. In this context, the credibility of the commitment to freeze domestic discretionary spending during the second term is undermined by the first term's performance. "2. The Republican philosophy appears more oriented to focusing on the size of government and the tax burden than on the magnitude of budget deficits. In fact, to some Republicans big deficits are a necessary evil on the path to smaller government. In contrast, many Democrats view fiscal prudence as contributing to good economic performance. This reflects, in part, the legacy of the Clinton/Rubin years and a recognition that budgetary capacity must be created now in order to preserve the major entitlement programs when the baby-boom generation retires. "3. Senator Kerry gives the deficit higher priority. Kerry has said that he would subordinate his spending initiatives to deficit reduction should that prove necessary to meet his deficit targets. In contrast, President Bush's priority is to make the tax cuts permanent. This stands in potential conflict with the goal of deficit reduction. "4. Senator Kerry proposes a broader set of tools to enforce budgetary discipline. He has endorsed reimposing the PAYGO provisions on both taxes and spending. In contrast, President Bush just supports PAYGO for spending."

[Economy.com hypothesizes that Congress might have enacted different policies from those it actually did. Specifically, it might have enacted a) a large, temporary payroll tax holiday; b) the same business expense write-off as above, but expiring much sooner; c) a larger family tax cut than what was actually enacted (but temporary); and d) much larger packages of temporary aid to state governments and to those who lost their jobs. According to its economic models, such policies would have produced faster economic growth and two million more jobs than the nation now has. Equally important, the hypothetical alternative would have increased deficits only temporarily, not permanently.]

"The president's fiscal policies have not been very efficacious in stimulating the economy and, moreover, any near-term benefits will eventually be overwhelmed by the impact of the persistently large federal budget deficits expected to result from these policies. Even under sanguine economic

7

RK note: The Bush administration and the Republican leadership opposed both those provisions; they were enacted only because a small number of Senators who held the balance of power insisted on their inclusion in the 2002 and 2003 tax cuts as the price for their support. Both those policies have expired, despite attempts by Democrats to extend them.

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assumptions, cumulative budget deficits over the next decade appear headed into the trillions of dollars. ... [Extension of the Bush tax cuts and other likely costs] would result in an expected cumulative ten-year budget deficit of well over an astounding $5 trillion, equal to almost 4% of GDP. Fiscal prospects seem set to erode even more substantially after the ten-year budget horizon with the aging of the population and the stresses this will place on Social Security, Medicare, and Medicaid. "Optimism that if the president's tax cuts are made permanent that they would create powerful incentives for more investment and harder work and thus ultimately more tax revenues and an improving long-term fiscal situation is misplaced. This supply-side argument is vastly overstated. There is no empirical evidence to suggest that lower top marginal tax rates, which have already been cut in half during the past quarter century, would provide anywhere near the necessary supply-side boost to the economy needed to right the fiscal situation.

10 Nobel Prize Economists on Bush vs Kerry

"President Bush and his administration have embarked on a reckless and extreme course that endangers the long-term economic health of our nation. John Kerry understands that sound economic policy requires a substantial change in direction, and we support him for President. "The differences between President Bush and John Kerry with respect to leadership on the economy are wider than in any other Presidential election in our experience. President Bush believes that tax cuts benefiting the most-wealthy Americans are the answer to almost every economic problem. The Bush Administration's tax cuts were poorly designed and therefore have given insufficient stimulus to job creation. The principal effect of the Bush Administration's fiscal policies has been to turn budget surpluses into enormous budget deficits. President Bush's fiscal irresponsibility threatens the long-term economic security and prosperity of our nation. At a time when our nation should be saving for the future, to pay the Medicare and Social Security benefits for the baby boomers, our national debt is swelling; the social contract that binds one generation to another is being threatened with unraveling. Increased borrowing from abroad­ now almost five percent of our GDP­leaves our country, our economy and global stability increasingly vulnerable to changes in sentiments of foreign, or even domestic, investors. At the same time, his policies have exacerbated income inequality, failed to address the real wage declines and rising health care costs beleaguering American families, and ignored the need for critical investments to spur long-term growth. "John Kerry will chart a different course. We believe that he will restore fiscal responsibility. He is committed to making key investments in human capital, such as helping families meet the cost of higher education. He has a proposal that will address the problem of rising health care costs. We believe that he has both the ability and the commitment to work with our allies and trading partners to promote global growth that lifts up workers around the world.

"Deficits ... that would ensue if the tax cuts are made permanent will have serious negative long-term economic "John Kerry is our choice for America's next President. We hope implications. Empirical that you will join us. evidence strongly suggests that deficits result in higher longerterm interest rates and crowd out private, more productive investment. ... Investment, productivity growth, and ultimately the nation's living standards will all be measurably weaker, and a more substantive (sic) fiscal crisis would eventually ensue. "The economic import of the bleak fiscal outlook has yet to be felt. Bond investors have yet to incorporate any of this into long-term interest rates. This will soon

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change, however, once corporate credit needs revive and bump up against the Treasury's ever-increasing funding needs. Unprecedented foreign buying of US debt will also eventually weaken. Measurably higher long-term interest rates will have a pernicious impact on the nation's long-term growth prospects."

In short, Economy.com faults the Bush tax cuts for being excessively expensive given the relatively small amount of anti-recession stimulus they provided, and of being fiscally irresponsible in the long run and therefore harming the long-run prospects for the economy. I add that the tax cuts were broadly regressive, making the already large and growing level of income inequality even worse than it would otherwise have been. Ten American winners of the Nobel Prize in economics endorsed Senator Kerry, having reached these same conclusions.8 (I am not aware that any Nobel Laureate economists have endorsed Bush, though there may be some.) Would Senator Kerry do any better? As many of the above exhibits show, the budget and the economy regularly do better under Democrats than under than Republicans. Bush accuses Kerry of being, in essence, a typical Democrat. Based on the economic and budgetary history of the last four decades, I would embrace such a charge.

"An Open Letter to the American Public, August 25, 2004." Signed by George Akerlof, Kenneth Arrow, Daniel Kahneman, Lawrence Klein, Daniel McFadden, Douglass North, Paul Samuelson, William Sharpe, Robert Solow, Joseph Stiglitz.

8

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Endnotes:

All budget figures for fiscal 2004 are from the Congressional Budget Office, "Monthly Update," October 6, 2004, http://www.cbo.gov/ftpdocs/57xx/doc5773/08-24-BudgetUpdate.pdf, as adjusted for final fiscal 2004 totals reported by the Treasury on October 14, 2004, http://www.fms.treas.gov/mts/index.html. The Director of CBO, Douglas HoltzEakin, was previously the chief economist at the Council of Economic Advisers under George W. Bush. Unless otherwise noted, all budget figures for 1962 through 2003 are from Office of Management and Budget, "Historical Tables," February 2004, Table 1.2, http://www.whitehouse.gov/omb/budget/fy2005/hist.html. OMB is the President's budget agency, which means that its Director, Joshua Bolton, was appointed by George W. Bush. Budget figures predating 1962 are from the Government Accountability Office (GAO), "Federal Debt: Answers to Frequently Asked Questions," GAO-04-485SP. CBO, "The Cyclically Adjusted and Standardized Budget Measures: Updated Estimates," September 2004, http://www.cbo.gov/ftpdocs/58xx/doc5802/09-14-BudgetMeasures.pdf. Data on nominal and real GDP, wages, and jobs are from the Bureau of Economic Analysis of the US Department of Commerce. Wage data are converted to real wages by dividing by the Consumer Price Index for all urban consumers (CPI), which is available form the Bureau of Labor Statistics. Data on population comes from the Statistical Abstract of the U.S., which in turn uses the Census Bureau. 2004 estimates for GDP and wages come from CBO's Summer Update, September 2004, http://www.cbo.gov/ftpdocs/57xx/doc5773/08-24-BudgetUpdate.pdf. The start and end of recessions is determined by the "dating committee" of the National Bureau of Economic Research. (The dating committee does not run mixers for single economists.) The growth of real GDP is the most important piece of economic information they examine, but by no means the only one. For a list of the starting and ending dates of all recessions since 1854, see NBER "Business Cycle Expansions and Contractions," http://www.nber.org/cycles/cyclesmain.html. CBO, "Effective Federal Tax Rates, 1979-2001," April 2004, table 1C, http://www.cbo.gov/showdoc.cfm?index=5324&sequence=0.

vii vi v iv iii ii i

Dr. Mark M. Zandi, Chief Economist, Economy.com, "Assessing President Bush's Fiscal Policies," July 2004, http://www.economy.com/dismal/economycom_bushfiscalpolicy.pdf. Economy.com is a commercial firm of economic consultants, not a public policy or political organization. It describes itself as "a trusted, independent provider of economic information since 1990 to clients worldwide."

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