Monday, August 01, 2011

The Truth About Our Deficits

by Dean Stephens

There are a lot of lies that are spouted about our deficits. However at the macro level there is some interesting data that clarifies what is false and what is true.

As an example, it is claimed that Clinton produced a booming economy and ended deficits. In truth, Clinton only enjoyed positive numbers in a single year, his last in office, and that had more to do with revenue increasing as a result of the technology boom than it did with any actions he took. The World Wide Web was invented before Clinton was elected and that unique technology was the sole factor that drove the huge boom late in his Presidency. He was lucky, not talented. With a Republican congress Clinton could not increase spending, so the revenue growth generated a small surplus in his final year. [Click here to see details of the budgets for the last 40 years.]

Looking at the macro numbers for George W. Bush also provides some interesting insight. Revenue plunged after the collapse of the tech boom and the horror of 9/11, both occurring in Bush's first year and did not recover until 2005. However the Bush tax rate reductions which Democrats still denigrate did not harm revenue at all. It even resulted in revenue increases as business recovered and created jobs, resulting in the lowest unemployment numbers since the boom years of the 1920s. This data supports the general theory that revenue always goes up in response to rate reductions. It is not immediate but it always takes place as long as the tax reductions do not fall below some rational rates needed to fund real government obligations.

However the Bush years also show that outlays grew much faster than revenue, indicating that Bush failed to exercise reasonable restraint. With a Democrat congress starting in 2007, outlays jumped even quicker. They went up $100 billion in 2007 and another $200 billion in 2008. It is arguable that the increased loan demand to fund the deficits Bush and the Democrat congress were running sucked capacity from the private sector and contributed to the recession in Bush's final year. It almost certainly helped to create the credit crisis that was the precipitating cause of the recession. As a result of the huge increase in borrowing by government, the private sector collapsed and revenue plunged $400 billion a year.

Everything that Obama has done has left the private sector staggering. Revenue remains flat at that $400 billion lower level. Spending has surged by $800 billion thanks to 2 years of total Democrat control of our government. The combination of reduced revenues and increased spending has created a structural deficit of $1.2 trillion that will not go down until something dramatic is done to change it.

However Obama insists on actions that continue to strangle private investment, crushing any chance of economic recovery. It is unlikely that tax reductions will fuel growth since taxes are near historical lows. However tax increases will damage revenue further and be counter productive. Realistically the only option we have is to reduce public spending so that we can stop sucking money from private financial resources. Freeing that money up will fuel investment opportunities. Economic growth will generate revenue through increased profits and greater employment.

How do we get Democrats to understand that?


At 8:45 PM , Blogger The probligo said...

That is a very succinct and reasonable summary. Thank you.

One point - I believe there is one factor in the cause of the deficit GWB created that you have left out; a continuing factor that is only now being addressed.

No, not Medicare.

The cost of Iraq and Afghanistan.


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