Those who have read my posts over the past two years know that state and local policy and regional economic trends, not national policy and macro economic trends, are my main areas of concern and expertise. In particular, right now I am more afraid of the next state budget than unstable, nuclear armed Pakistan. Since part one of the Presidential campaign begins and ends this month, however (with part two not beginning until September) I’ve decided to analyze and write a series of posts on the federal budget. One task in doing so is to try to standardize the measure of federal revenues and expenditures to disentangle the decisions made by each administration from the external conditions that had nothing to do with those decisions. This means adjusting the figures for inflation, and for the resources available in the country, something I do at the state and local level by tabulating state and local revenues, expenditures and debt as a percent of personal income, the best measure available for counties and up, and will do at the national level by tabulating revenues, expenditures and debt per $100,000 of Gross Domestic Product (GDP).
I’ve decided to start the analysis with Ronald Reagan, because (as we will see) for the past 28 years we have been living in either the “deficits don’t matter” era under Republicans or the “era of big government is over” era under Bill Clinton, a shift from the tighter fiscal policies and government expansions of the previous, FDR and after era. The first year included in the tables will be a year of the Carter Administration, not to evaluate President Carter’s choices (because without a year in a prior administration we cannot) but to evaluate President Reagan’s. I will also include budget data from representative years under Presidents George HW Bush, Clinton, and George W. Bush’s administrations, with the latter being the most recent available.
Presidents, Governors and even Mayors often get unfair credit or blame for changes in conditions based on the point in the economic cycle when they are elected, and then re-evaluated. Politicians encourage this misperception by deceptively comparing fiscal conditions (like the budget deficit) or economic conditions (like employment and unemployment) from the peak of an economic cycle to the bottom, or vice versa. For example, the Democrats blame the current Bush Administration for slow employment growth, not acknowledging the fact the W. walked into a recession and, with an aging population, the labor force available to be hired is not growing as fast as in the past. The Republicans, for their part, credit W. with a falling federal budget deficit during the years since the last recession, not acknowledging the fact that it is the economy itself that has reduced the budget deficit, not anything W. has chosen to do. Adjusted for the economic cycle W’s deficits are huge. In order to see the choices that have actually been made, I have sought to find comparable years in each Administration. The spreadsheet I used to do so, while not spruced up for presentation and printing, is attached.
The 2008 Statistical Abstract of the United States is hot off the internet, and the latest fiscal year for which actual federal revenue and expenditure data is available is FY 2006. That was a pretty good economic year for the Bush Administration, with unemployment at a low 4.6%, probably the lowest of the W. years, solid growth GDP at 3.3% in real dollars, and the federal budget deficit at 1.9% as a share of GDP, the low for the Administration thus far (the estimate is FY 2007 1.8% but it wouldn’t surprise me if it was higher; forget FY 2008). GDP growth is often greatest in the early years of an economic boom, and those are often the years of greatest profit for business, while employment lags on the upside and downside, meaning workers are best off in the last year of a boom not in the first. So in each administration, I have sought to find a federal budget from a late up-cycle year. For the most part I was able to do so.
For the Clinton Administration, 2000 is the obvious choice. Like 2006, it was the last good year before the onset of recession, with the low unemployment rate for the administration (4.0%), solid real GDP growth (3.7%), and the best budget balance of the Administration (a 2.4% surplus). For the Reagan Administration, as well, there is a directly comparable year, Fiscal 1989, which although the administration ended earlier that year, was Reagan’s last budget. That year also featured a 5.3% unemployment rate, lower than any year of the Reagan Administration proper, and solid 3.5% real GDP growth. The budget deficit was 2.8% of GDP that year, high yet the lowest of the Gipper’s years. The following year, despite the breaking of the “read my lips” tax pledge the deficit soared to 3.9% of GDP as the economy weakened.
The Carter Administration, and the “era of big government,” ended in recession. The best Carter year for unemployment, at 5.8%, and the federal budget deficit as a share of GDP, at 1.6%, was in 1979, and like the other comparable years it was a solid real GDP growth year at 3.2%. So 1979, not 1980 or 1981, is the base year selected for the table. So things weren’t bad in 1979, the year I graduated from high school. Things were really bad when I left college, as 1982 and 1983 featured the two highest unemployment rates since the Great Depression.
Then there is the administration of George HW Bush. He picked a bad time to be President, and there really is no good year to choose. His lowest unemployment rate was in 1990, but that was just his first budget, and thus may not be representative of his administration’s choices, and real GDP growth was just 1.9% that year. The best GDP growth for the administration, at 3.3%, was in 1992, but unemployment was 7.5% that year and the budget deficit was 4.7% of GDP. So the most comparable year available is FY 1993, the last budget for George I, a year that featured a 2.7% real GDP growth rate, a 6.9% unemployment rate, and a federal budget deficit at 3.9% of GDP, tied for the administration’s low.
When looking at the federal budget data, therefore, give the administration of George HW Bush a little credit for the conditions he was facing. We may have do so, as well, for the next President, although unlike Ronald Reagan I don’t think W. will get out office before the economy tanks, allowing him to be fairly blamed for the negative economic results of his policies and unfairly blamed for much else as well. Hopefully by 2012 the next President will be able to say “It’s Morning Again in America.”
It isn’t just the trends in the economy that alter a President’s choices. As we will see the Peace Divided and War on Terror, at least part of which most people will believe was necessary, feature prominently in the budget shifts of the past 27 years. The chosen year of the administration of George II featured a high level of disaster spending because there had been many natural disasters, not because that has been one of W’s priorities (as the Katrina response painfully showed). Spending on farm subsidies has been reduced by rising food prices, but this is pushing up spending on food stamps and related spending. The chosen year of the administration of George I featured high level of taxpayer subsidies for bank deposit insurance because of the Savings and Loan disaster, which was generated by the regulatory policies under President Reagan and the Keating Five. We may face a similar spending necessity soon.
One cannot just look at the numbers without remembering what happened, and what decisions were made, that can explain the numbers. But one cannot evaluate administrations just by what they were doing, or said they are doing, because that is often not the real story, or the whole story. Much of the noise is about minor decisions of little consequence. The numbers show what the significant shifts were.
When evaluating the federal budget, it is important to focus on the big ticket items that matter most. And it is important to remember how little the federal government actually does directly. In Fiscal 2006, all federal outlays equaled 20.0% of GDP, but work actually undertaken by the federal government only equaled 7.0% of GDP, with 4.7% for the military and 2.3% for everything else (and the Post Office accounting for a large share of everything else). This is dwarfed by state and local government at 12.1% of GDP. Unlike the office of Mayor, therefore, the Office of President is a policy office, and a leadership (of the people not just the government) office, much more than a management office. Most of the money collected by the federal government is sent right out again as aid to state and local governments (which actually do the work), to businesses for services (especially for health care under Medicare), to individuals as aid (in particular Social Security) and, increasingly, as interest on the debt. Federal payments to or for individual people totaled 12.0% of GDP; I’ve included a separate worksheet of information for that separately in the spreadsheet.
That federal budget analysis spreadsheet will be attached to my next post for your viewing, and I will tell you what I think it means to me as fast as I can write it. And, of course, if you want to look at every year going back to 1940 or so, the Census Bureau has it available, thanks to their wonderful inclusion of “historical” worksheets in many of the spreadsheets of online version of the Statistical Abstract, a tremendous and much appreciated piece of work. Everything you need to know is in there, or linked from there. But you can start with the data I present.