If U.S. fiscal history were a guide to politics, Democrats would be running in the 2010 mid-terms on a platform of raising taxes and doubling domestic spending on everything from infrastructure to healthcare to alternative energy. Instead, even in the midst of an economic meltdown that rivals the Great Depression, they are running away from Barack Obama’s modest spending programs and struggling to justify a very manageable budget deficit.
Republicans are already on the attack, branding Obama as a “socialist” big spender who is driving the nation to ruin by running up huge deficits. In just 18 months, they say, Obama has passed a stimulus spending bill worth nearly $900 billion and a sprawling $1 trillion national health insurance program that together are creating what House Republican leader John Boehner calls “job-killing deficits” of historic levels.
Mr. Boehner and his fellow Republicans say that we need stimulative tax cuts for the rich and domestic budget austerity for everyone else in order to kick-start an economic recovery. But that is what got us into this financial crisis, abetted by two costly wars and the deregulation of financial markets.
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Democrats should welcome this debate about deficits and taxes because the facts of U.S. fiscal history are clearly on their side. In order to win this fall, they must stop running away from the Republicans perennial “tax and spend” labeling and get back on offense.
If Democrats suddenly got a bit of old-time religion on all matters fiscal, they could begin pointing out that GOP presidents have increased the national debt fivefold in the past 30 years; cut infrastructure spending by half while nearly doubling military outlays; and cut federal revenue by trillions of dollars with tax cuts for the wealthiest 2% of the population.
Under this new dispensation, here is what their campaign talking points might look like.
U.S. budget deficits are high at the moment not because we are spending too much, but because we have cut federal revenue to the bone. According to the White House Office of Management & Budget, total federal receipts have plunged from nearly 20% of GDP when Ronald Reagan took office in 1981 to 14.8% today. This decline is due primarily to massive Republican tax cuts for corporations and the wealthiest 2% of the population.
For example, from 1936 to 1980, the top marginal tax rate averaged almost 80%, reaching as high as 94% during World War II. Since 1981, starting with Ronald Reagan, it has averaged 39.4%. It reached an historic low of 28% under Reagan, inched up to 39.6% under Clinton, and has been at 35% for the past 10 years, since George W. Bush’s first tax cuts.
At the same time, corporate income tax as a percentage of GDP fell from a high of 6.2% under Eisenhower in 1952 to 1% under Reagan. It rose above 2% under Clinton, but is currently at 1% again courtesy of the Bush tax cuts. Total annual government revenue from corporate taxes as a percentage of GDP has dropped accordingly, from 30% in 1946 to 10% today. This has been happening at a time when many of the nation’s largest corporations were making record profits, yet 60% of them paid no income taxes at all from 1996 to 2000.
Starting with Reagan, there have also been major cuts in the inheritance tax, (a.k.a. “Death Tax”) the Windfall Profit tax, increases in interest exclusion caps, accelerated depreciation allowances and more. In sum, we have had fiscal mayhem on the revenue side since 1981, due largely to Republican tax cuts under Ronald Reagan and George W. Bush. Today, the U.S. collects 20% less in total annual federal tax revenue as a percentage of GDP than the average of all other G7 nations except Japan.
Deficits & Debt
Not surprisingly, both deficit spending and the national debt exploded under tax cutting Republicans Ronald Reagan and George W. Bush. The national debt tripled under Reagan and George H.W. Bush after nearly 40 years of bi-partisan decline. George W. Bush almost doubled the nation’s debt by presiding over the largest dollar increase (well over $4 trillion) of any previous U.S. President.
Sandwiched between Reagan-Bush and George W. Bush, Democrat Bill Clinton raised the top marginal and corporate tax rates and managed to bring down both the deficit and the national debt. He did this while creating more jobs in eight years than during the entire 20 years of Reagan-Bush and George W. Bush.
By the time Obama took office, 20 years of unprecedented fiscal recklessness by Republican presidents had created an economy hollowed out due to a combination of increased military spending, declining tax revenues and declining investment in domestic infrastructure and manufacturing. Ironically, that is why nearly all modern Keynesian economists, such as Nobel Laureates Paul Krugman and Joseph Stiglitz, argue that substantially more spending is needed on carefully targeted stimulus and infrastructure projects for recovery to take hold. Given the historical context, they argue, the problem is not that Obama is spending too much, but that he is spending too little to lift the economy out of our current “Great Recession.”
This argument harks back to Franklin Roosevelt’s administration and the Depression of the 1930’s. Deficit spending under Roosevelt averaged just 2.38% of GDP for the entire decade of the ’30’s. As a result, the nation stayed mired in economic crisis. It is generally acknowledged that Roosevelt’s massive deficit spending during World War II is what finally lifted the economy out of depression. Here are the deficit spending figures as a percentage of national GDP during World War II:
1942 – 12.04%
1943 – 28.05%
1944 – 22.35%
1945 – 24.07%
Here are the figures since 2007, when the current recession started to be acknowledged:
2007 – 1.14%
2008 – 3.18%
2009 – 9.91%
2010 – 10.64% projected
Deficit spending (2009-’10) as a percent of GDP under Obama is less than half that of Roosevelt during WWII. The national debt at the end of WWII was 120% of GDP. Today, in spite of the damage done by Ronald Reagan and George W. Bush, and including the Bush bank bailout and the Obama stimulus package, it is less than 88%. We could double deficit spending for several years without reaching World War II levels of debt, especially if we started taking steps to reverse the historic decline in revenue at the same time.
Infrastructure vs. Military Spending
During this 30-year period dominated by deep Republican tax-cuts for the wealthy, we have had scandalously low investment in industrial and civic infrastructure other than military manufacturing. The percentage of total federal domestic spending on civilian infrastructure has declined nearly 50% since 1981, to an anemic $90 billion annually.
In contrast, defense spending increased 175% under Reagan-Bush and George W. Bush. The United States now spends $1 trillion annually on weapons and warfare, more than twice the amount spent by the rest of the world’s nations combined. Military contracts are the number one source of federal spending in all but a handful of states and many Congressional Districts. More than 53% of discretionary federal spending (in inflation adjusted dollars) goes to the military, not including the constantly escalating cost of a vast web of federal intelligence gathering agencies and the bloated Homeland Security Department. If these intelligence and security functions are added, as much as 63% of discretionary federal spending goes to military, intelligence and security costs.
We are turning the United States into a corporatist military garrison and bankrupting ourselves in the process. We do not need to spend twice as much as the rest of the world on our military every year to aggressively fight a few hundred al-Qaeda operatives scattered around the globe. We must stay on offense, but a substantial percentage of current military outlays can and should be spent at home where they will stimulate the economy and improve our quality of life.
We are going to spend our way out of the current fiscal crisis one way or another. The only question is whether we will do it voluntarily while implementing progressive tax policies to help offset the cost, or whether we will find another war to invest in while cutting critical domestic programs to pay the increased military costs. Since George W. Bush, ever expanding war and shredding the social contract seem to be the preferred Republican solutions to stimulus and debt management, respectively.
Democrats clearly have historical facts on their side in any argument with Republicans about taxes, deficits and overall fiscal stewardship. They should be talking about these facts at every opportunity and reframing the political debate as a choice between the endemic fiscal recklessness of Republicans versus responsible Democratic investment in our own future.