Wednesday, July 27, 2011

Grover Norquist and 1990 Budget Deal

Tyler Craft takes issue with Grover Norquist's assertion that the decision by then-president George Bush to raise taxes led the nation into a recession:
George H.W. Bush’s famous (or infamous, depending on one’s point of view) increase to taxes (and reversal in his, in my opinion, foolish “no new taxes” pledge) came out of the Omnibus Budget Reconciliation Act (OBRA) of 1990, which took affect on January 1, 1991. So what actually happened? Technically yes (see graph below), the United States went into a recession following the OBRA of 1990 going into effect. Per the official definition of a recession, that a recession is two consecutive quarters of negative GDP growth (I’m using real GDP figures), the United States experienced negative growth in the fourth quarter of 1990 and the first quarter of 1991. HOWEVER, the largest period of economic contraction actually occurred in 1990 NOT 1991. The first quarter of 1991 showed a trend of growth beginning that would continue throughout the rest of the 1990s. So using Grover Norquist’s post hoc ergo propter hoc view of the world, The OBRA of 1990 actually brought the country OUT of a recession rather than INTO a recession – of course this would be equally (well maybe not quite equally) fallacious....

One of Norquist’s economic statements was correct; spending did grow following the OBRA of 1990 and along with it the deficit. In fact, public debt as a percent of GDP in the mid-1990s is very similar to its levels in the mid-2000s (around 67% of GDP in each case) – of course we all know that the late-1990s and late-2000s saw deficit and debt figures move in opposite directions (surpluses in the ‘90s reduced debt while growing deficits in the 2000s caused even higher debt). There is, again, more to this story however. The next graph illustrates how total spending and non-defense spending evolved for the last few decades compared to GDP. It shows relative rises with respect to GDP around the time of various recessions and also shows the spike Norquist alluded to in 1991. This is where the data does not tell the whole story and the historical narrative provides some important information. The OBRA of 1990 was not the first budget proposal by President Bush that year, it was actually the third. The first included spending cuts with no tax increases and was rejected by Democrats, the second included spending cuts with tax increases and was rejected by Republicans, and the third was accepted. Interestingly enough, the third proposal increased spending more than the second proposal, but came in the face of government shutdown, which forced enough support to get higher taxes through. The third option also shifted much of the tax increases from excise increases to income tax increases, which is also less conservative – although preferable from a growth and equity perspective.

No comments: