Taxes v. Spending

        President Barack Obama has just put forth a massive spending and tax reduction package to turn the failing American economy around. His upcoming budget has by far the largest deficit in history. There has been a tremendous hue and cry from the chattering class over this—from both those in favor of the president's programs, and those opposed. We need some reality checking here.

        The easy one first; the budget deficit. Yes, it's the biggest ever. BUT, and this is a big but, the deficit isn't as much bigger than recent budgets as it appears at first glance. "Howcomeforwhy?" you ask? Several reasons. The main reason is the hundreds of billions of dollars we have spent on the wars in Iraq and Afghanistan in recent years never appeared in the president's budget—those monies were "off budget." There were other bits of spending slight-of-hand that kept various federal expenditures out of the budget that are included in the new budget rather than being kept off budget. Putting them to the budget adds to the apparent deficit. If you go back through recent budgets and add in those "off budget" expenditures, you'll find that those budgets had much higher deficits than claimed, and that this new budget isn't that much worse.

        Now for the lower taxes vs. spending argument.

        One side argues that lowering taxes boosts the economy, the other insists that government spending does the boosting, that cutting taxes doesn't.

        What does history say on the matter?


        After the 1929 stock market crash, President Herbert Hoover insisted that lowering taxes and not regulating industry, particularly the financial industry, would vastly improve the country's failing economy. Say "Hello Great Depression!"

        President Ronald Reagan insisted that lowering taxes, particularly on the very well off, and gutting regulatory agencies would lead to prosperity for all. He acted on that in 1981. What the lowered taxes and lessened reguations led to was an income disparity between the rich and the poor greater than had been seen since before the Great Depression (which means the rich got richer and the poor and middle class got poorer), and set the stage for the savings and loan collapse at the end of President Reagan's second term. The Federal government found itself running the biggest deficits since World War II, and the national debt rose to its highest levels ever.

        As his first order of business in 2001, President George W. Bush lowered taxes (mostly for the very well off and on investment income), and further gutted the Federal regulatory agencies. President Bush inherited a budget surplus. Within months of his taking office, the surplus was wiped out and deficit spending and the national debt were growing—until they reached greater heights (depths?) than they had under President Reagan. Income disparity again reached a level not seen since before the Great Depression—with a major difference; there were fewer rich people to enjoy the disparity. Today, the US economy is in its worse shape since the Great Depression, and most economists believe the current recession could deepen into another depression.

        On the other side of the argument:

        In 1933, when Franklin Delano Roosevelt became president, the Great Depression was in full bloom. The national unemployment rate was 25%, more than a million families had lost their homes, 11,000 banks had collapsed, the stock market had dropped 90%. I could go on, but that should make the point—the economy was in a catastrophic state. President Roosevelt immediately began pumping money into the economy, mostly projects meant to provide jobs. By the beginning of Roosevelt's second term in 1937, the unemployment rate was down to 10% (I've seen other figures ranging from 7% to 14.3%, but 10% is the one most frequently cited). That year, President Roosevelt bowed to the loud voices insisting that pumping money sinto the economy and increasing the national debt wasn't working, and cut back on his various jobs programs. The unemployment rate quickly shot up to 19%, and the Great Depression lingered until 1942, when World War II finally ended it.

        General Dwight D. Eisenhower became President in 1953 and soon after launched one of the biggest and most expensive public works programs in history, the Interstate Highway system, paid for with tax money. American prosperity grew to unprecedented heights, and the American middle class grew both large and strong. President Eisenhower also put very significant money into the Space Program, which led to countless technological advances (think home computers, digital anything, and heart pacemakers, among things) and put America firmly on the top of world technological development.

        Bill Clinton began his presidency in 1993 by increasing the top marginal income tax rate by 3%—personal income in excess of $200,000 per year was taxed at a 3% higher rate—to 39% (the top marginal rate a generation earlier had been 70%). He also restored some heft to the regulatory agencies, and increased spending on some domestic programs. The American economy had one of its greatest growth periods in history. By the end of the Clinton Presidency, the Federal government was operating on a balanced budget, and the Treasury had a surplus.

        So, looking back over the past eighty years, at three presidents who cut taxes and regulations, and three who pumped money into the economy, it seems fully evident to me that pumping money into the economy is beneficial, but cutting taxes leads to bad things.

        A side point, having to do with capital gains taxes. It's never made sense to me that income earned by work should be taxed at a higher rate than income earned by money.