|Cato Policy Analysis No. 147||February 4, 1991|
by Stephen Moore
Stephen Moore, Director of Fiscal Policy Studies, Cato Institute.
Midway through his presidency, George Bush is mired in a fiscal policy crisis worse than anyone could have envisioned when he entered the Oval Office two years ago. This crisis is the resurgence of record federal deficits. In January the Office of Management and Budget issued its budget forecast predicting that deficit spending will climb to a staggering $325 billion in 1992--not including the cost of Operation Desert Storm.(1) That is roughly $1 billion in federal borrowing each day. Even last year's $140 billion five-year tax hike--the second largest ever--will not stem such a tidal wave of red ink.
The deterioration of America's fiscal health cannot be blamed on the legacy of Reaganomics, as liberals have argued. Nor is it, as conservatives maintain, primarily the fault of the pro-spending coalitions in the Democrat-controlled Congress--although certainly some of the blame lies there. It is almost exclusively the creation of the Bush administration itself.
The crisis has been caused by an explosion of new domestic spending under Bush. Between the time that Reagan left the White House in 1989 and next year (FY 1992), domestic spending will have climbed by $300 billion--from $670 billion to $970 billion.(2) Since 1989 the federal government's domestic outlays, adjusted for inflation, have grown by an enormous 10 percent per year.(3) Domestic spending is expanding at a faster clip under Bush than it did under other recent presidents typically labeled as big spenders, including Lyndon Johnson, Richard Nixon, and Jimmy Carter. Incredibly, Bush is on the way to being the biggest champion of new domestic spending since Franklin Roosevelt.
Some of the increases in spending may have been beyond the direct control of the White House. For instance, large domestic expenditures have been required to bail out the savings and loans--crisis that was not created by Bush. Yet dozens of new spending programs--for education, space exploration, transportation, and the fight against drugs--have been launched, not over the Bush administration's objections but with its endorsement and in some cases at its insistence. They are expenditures that OMB director Richard Darman labels "investments in the future." In dollar terms, over two years those "investments" have translated into increases of $34 billion for the Department of Health and Human Services, $18 billion for housing and related programs, $5.5 billion for agricultural programs, $4.7 billion for the Department of Education, and $2.5 billion for the Department of Energy. In the early 1980s Reagan made an impassioned plea for the abolition of the latter two agencies. Last October Bush signed legislation to spend $40 billion a year for both.
To argue that the current economic recession and deficit crisis are an indication that the supply-side policies of the 1980s have finally come back to haunt the nation is to completely misunderstand the economic policy orientation of George Bush. Whereas Reaganomics was based on the tenets of lower tax burdens and reduced government spending, the core of "Bushonomics" appears to be ratcheting government spending upward and raising taxes to pay the tab. It took Reagan six years to reduce government spending from 24 to 22 percent of GNP. It has taken Bush only two years to push spending back to its peak of the early 1980s.
When Reagan handed the federal purse strings over to the Bush administration, the country's economic and fiscal outlook was not gloomy, but unusually bright. In January 1989, following six consecutive years of economic growth and five consecutive years of declining budget deficits (from 5.4 to 2.9 percent of GNP between 1985 and 1989), even the usually cautious Congressional Budget Office anticipated four more years of continued slow but steady reductions in federal deficit spending--down to 2 percent of GNP by 1993.(4) Virtually every blue-chip private forecaster concurred. Instead, the deficit will climb to at least 4.5 percent of GNP this year. In sum the Bush administration has not inherited the nation's budgetary and economic problems; it has created them.
Clearly, Bush must return to the supply-side policies that won him the White House if his administration is to rescue the faltering economy and reverse the flow of red ink. The administration should start by abandoning the phony spending and tax benchmarks established by the 1990 bipartisan budget agreement. The pact, which promised near ly $500 billion in deficit reduction, is now almost universally recognized as a fraud perpetrated solely to win political support for a massive tax increase that makes room for new spending. It will not reduce the deficit, as recent forecasts reveal. Entitlement programs will expand by $200 billion over five years under the agreement. Not a single program in the 1,300-page budget will be terminated. Domestic discretionary spending will climb by at least 6 percent under the spending ceilings. That spending rate represents progress only when compared with the administration's dismal track record in restraining domestic expenditures over the past two years.
The deficit-reduction strategy that holds greatest promise is the one on which Bush originally campaigned for the presidency: the flexible spending freeze.(5) If Bush had capped overall spending at 3 percent of nominal growth during his first three years, the deficit next year would be $97 billion, not more than $300 billion.
Could such a spending cap be effectively enforced today? One reason to think that it could be is that many defense analysts believe that military expenditures should fall sharply in the future, given the diminished Soviet threat in Europe and elsewhere, regardless of what happens in the Persian Gulf. That means that not all of the pressure for reducing expenditures needs to fall on the domestic side of the budget, as it did in the early 1980s. Further, although a 3 percent growth cap may seem an austerity measure in Washington, it is noteworthy that many state governors, struggling to comply with constitutional balanced-budget requirements this year in light of the recession, will be pleased if they are able to increase expenditures by 3 percent in 1991.
So far, Bush has proven himself to be one of the most profligate presidents in U.S. history, with little or no capacity for saying no to special interests. Although he accused Michael Dukakis of being a big-spending liberal from Massachusetts, his own administration measures its commitment to education, the environment, transportation, housing, and other areas by how much it is willing to spend. To pay for its profligacy the Bush administration has imposed on the American worker a record federal tax burden and a record expansion of the federal debt. If the administration refuses to reverse the cycle of unprecedented growth in domestic spending, record-high federal taxes, and mushrooming deficits, the economic recession may be far more severe than anyone is now predicting and the blame will rest squarely on the White House steps.
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