COP: Laffer and Moore: Obama's Real Spending Record

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There's no way around the facts. Under Presidents Bush and Obama, government exploded as a share of the economy.

By ARTHUR B. LAFFER
AND STEPHEN MOORE

President Obama shocked us the other day when he said, "Since I've been president, federal spending has risen at the lowest pace in nearly 60 years." Having heard him champion the "multiplier effects" of deficit-financed stimulus spending, we saw him as an enthusiastic supporter of throwing other people's money at just about any problem.

Thus began our quest to see where we had strayed from the straight and narrow. Here's the picture.
In the chart nearby we've plotted federal government spending on a National Income and Product Accounts (NIPA) basis as a share of total U.S. GDP from 1990 to the present. The NIPA numbers are used here as opposed to appropriations or outlays to capture the actual periods when production occurs. The stories the chart tells are amazing.

Editorial board member Steve Moore details how spending soared under President Obama. Photo: Getty Images.

The first is how much government spending fell during President Bill Clinton's eight years in office and how low it was when he left office. When he became president in 1992, government spending was 23.5% of GDP, and when he left in 2001 it was 19.5% of GDP. President Clinton, in conjunction with a solid Republican Congress, cut government spending by more than any other president in modern times, and oversaw one of the greatest periods of economic growth and prosperity in U.S. history.

Sadly for fiscal conservatives, the biggest surge in government spending came during the last two years of President George W. Bush's eight years in office (2007-2008). A weakened Republican president dealing with a strident Democratic Congress, led by then-House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, resulted in an orgy of spending.


Mr. Bush and Republicans in Congress capitulated to and even promoted each and every government bailout and populist redistribution canard put before them. It's a long list, starting with the 2003 trillion-dollar Medicare prescription drug benefit and culminating with the actions taken to stem the 2008 financial meltdown—the $700 billion Troubled Asset Relief Program, the bailout of insurance giant AIG and government-sponsored lenders Fannie Mae and Freddie Mac, the ill-advised 2008 $600-per-person tax rebate, the stimulus add-ons to 2007's housing and farm bills, etc. The script had it that greedy right-wingers were the cause of our collapse, and deficit spending and easy money the answer.

The numbers are mind boggling. From the second quarter of 2007, i.e., the first full quarter of a Pelosi-Reid dominated Congress and a politically weakened President Bush, to the second quarter of 2009 when President Obama assumed office, government spending skyrocketed to 27.3% of GDP from 21.4%. It was the largest peacetime expansion of government spending in U.S. history.

 After taking office in 2009, with spending and debt already at record high levels and the deficit headed to $1 trillion, President Obama proceeded to pass his own $830 billion stimulus, auto bailouts, mortgage relief plans, the Dodd-Frank financial reforms and the $1.7 trillion ObamaCare entitlement (which isn't even accounted for in the chart). While spending did come down in 2010, it wasn't the result of spending cuts but rather because TARP loans began to be repaid, and that cash was counted against spending.

In 2011 and 2012, the pace of spending was slowed when a new emboldened breed of Republicans took back the House promising to end the binge. The House Budget Committee, headed by Wisconsin Rep. Paul Ryan, has identified about $150 billion of new spending Mr. Obama wanted in 2011 and 2012 that Republicans would not approve. As the chart shows, government spending as a share of GDP fell, and taxes were not raised. But to attribute this drop in government spending to the president or congressional Democrats would be dishonest.

Slowing spending and the decision not to raise taxes may have prevented the Great Recession from becoming the next Great Depression. In 1930, the Smoot-Hawley tariff was signed into law by another weak Republican president, Herbert Hoover. Smoot-Hawley was the largest single tax increase on traded products in U.S. history. Not surprisingly, the markets collapsed.

Like President Obama, President Hoover proposed massive tax increases. Unlike Mr. Obama, Hoover was successful. The highest marginal income tax rate jumped to 63% from 24% on Jan. 1, 1932. That November, Hoover lost the election to Franklin D. Roosevelt in a landslide.

As if Hoover's tax increases weren't enough, on Jan. 1, 1936, FDR raised the highest marginal income tax rate to 79% with further rate increases up to 83% coming later. Estate and gift taxes, taxes on retained earnings, state and local taxes were also raised. This is why the Great Depression was the Great Depression—massive deficit spending and tax rate increases.

Associated Press

President Barack Obama.

Today's economy is again decelerating in no small part because on Jan. 1, 2012 we face Taxmageddon—the largest automatic tax increase on investment and businesses in generations, including the end of the Bush tax cuts and the more recent payroll tax cut. According to the Congressional Budget Office, this would drain $607 billion out of the economy next year, pushing us back into recession.

Keynesians, of course, are advising more deficit spending and easy money. But the most amazing feature of the nearby chart, which is rarely ever noted, is that when spending declined sharply the economy boomed under President Clinton, and when spending soared under Presidents Bush and Obama, the economy tanked.

Maybe Keynes was wrong and Milton Friedman was right when he warned that government spending is taxation and that government can't tax an economy into prosperity. Friedman made it clear time and again that restraining government spending stimulates the economy by liberating private resources.
The good news is that the tea party Republicans who took office after the 2010 elections have completely altered the face of the opposition. Legislation to repeal ObamaCare and Dodd-Frank soared through the House, as did Rep. Ryan's proposed plan to curb federal spending and lower tax rates for individuals and businesses.

Next, look for an insurrection of closet Clinton New Democrats against their party's big-government leadership, as may have begun last week when Mr. Clinton and other leading Democrats pronounced that all the Bush tax rates should remain in place for another year.

The right point of focus is not at what pace spending has grown under President Obama but instead how much more he needs to cut spending from its bloated levels to bring the economy back to health. The huge increase in spending as a percentage of GDP under Presidents Bush and Obama is the reason we are experiencing the slowest recovery since the Great Depression. As Milton Friedman understood, an economy cannot spend or tax itself into prosperity.

Mr. Laffer is president of Laffer Associates. Mr. Moore is a member of the Journal's editorial board.
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