April 21, 2011
Would You Accept Clinton Tax Rates If Combined With Gingrich Spending Levels?By Noel Sheppard
The media were enthralled by former Federal Reserve chairman Alan Greenspan's suggestion on Sunday's Meet the Press that we should immediately end the Bush tax cuts and raise the marginal brackets to what they were in Clinton's last year in office.
Before conservatives summarily cast this aside, maybe it should be considered with one caveat: we also go back to former House Speaker Newt Gingrich's spending levels in 1999.
Consider the numbers before thinking me crazy.
Gingrich's last budget before he resigned as Speaker had total unified expenditures -- meaning including Social Security and Medicare -- of $1.7 trillion. Adjusted for inflation, that would be $2.3 trillion today. As the Office of Management and Budget is estimating tax receipts of $2.5 trillion this fiscal year, we would produce a $200 billion surplus.
Imagine the economic benefits as the dollar exploded in value along with treasury prices bringing long-term interests rates down, while pushing oil and commodity prices as well as inflation far lower too.
For those questioning this causal relationship, professional investors for years have been shorting the U.S. dollar and buying gold and other commodities. This has been tremendously rewarding for quite some time. Anything that ended this decline in the dollar -- a balanced budget, for example -- would result in a huge unwinding of this carry trade that would have very positive impacts on our economy.
Sure, we'd all pay a little more in taxes, but this would easily be made up for by the economic and stock market explosion it would likely create. The decline in long-term interest rates might also help the almost dead housing market which could then spark new construction hiring while firming up all our balance sheets.
To get to this spending number, we'd have to see massive cuts in defense that could be almost impossible given our involvement in three overt wars and at least one covert one. But the reduction in programs despised by the Tea Party would be just as big, requiring the kinds of entitlement reforms proposed by both Congressman Paul Ryan (R-Wisc.) and the President's debt commission, maybe even more so.
Consider that total Human Resource spending in 1999 -- Social Security, Medicare, etc. -- was only $1.1 trillion. Adjusted for inflation, that's $1.5 trillion today compared to the projected $2.5 trillion for fiscal 2011.
In order to cut that additional $1 trillion, all entitlement programs would require radical reforms that of course would have to be phased in over a number of years so as not to negatively impact those currently receiving benefits or those soon to be. However, that's the kind of discussion that would be necessary to make this happen.
Isn't that the kind of conversation conservatives desperately want?
The point here is that Obama and his minions see the panacea for everything as being tax hikes on the rich. As American Thinker reported last week, and CNS News and the Wall Street Journal reported Monday, taking all of the income from top wage earners wouldn't come close to balancing the budget.
As such, this fallacy needs to be exposed and quickly before virtually the entire gullible class believes that's all we need to do to fix our fiscal mess. When that happens, forget about any serious deficit reduction discussion.
With this in mind, rather than running away from the myth that the Clinton budgets were a magic elixir, let's embrace it.
The left all view the Clinton era as being the shining example of fiscal policy creating a strong economy, but what they ignore is the spending restraint that happened in the '90s that was a huge factor in creating those so-called budget surpluses as well as the powerful recovery.
After all, only a liberal would believe raising taxes stimulates an economy.
Despite the other obvious factors involved in the '90s expansion -- loose monetary policy early in the decade, the end of the Cold War, and a once in a lifetime technological boom with associated stock bubble -- this period also witnessed unusual fiscal restraint in Washington, as total federal spending only grew by 42 percent.
Compare this to the '80s when outlays rose by 115 percent, which was actually down from 184 percent in the '70s. Spending grew by 107 percent in the '60s, and more recently, 117 percent in the '00s.
This means federal expenditures during the '90s increased at the slowest pace in the last five decades. Putting even a finer point on this, spending in the '90s grew at less than 1/3 the rate of the average of the other four decades -- demonstrating that the four decade mean increase was three times the '90s.
But there's more. The only other decade in the previous century with less spending growth was the '20s when Presidents Warren Harding and Calvin Coolidge actually reduced the budget by almost 50 percent while also cutting taxes.
As readers should know, this so happened to be the decade that witnessed the strongest economic growth in the last century, albeit ending up in a huge stock market crash that led to the Great Depression.
Regardless, what this means is that conceivably the two strongest economic decades of the 20th Century coincided with tremendous fiscal restraint in Washington, and any deficit reduction plan today should certainly emulate those precedents.
To only tinker with the tax code to solve our current problems would be akin to hemming only one pant leg. This gives the right a fabulous opportunity to act as the nation's tailor.
If Republicans agreed to go back to the Clinton tax rates only if his inflation-adjusted spending levels were also adopted, a more serious discussion about what got us to this position -- as well as what was also largely responsible for those so-called surpluses and the relative prosperity that came with them -- would naturally ensue.
Better still, the GOP would be seen as reaching quite a generous hand across the aisle in the form of tax hikes and defense cuts abhorred by its base. Republicans would instantaneously become the real agents of change willing to go against their core beliefs to save the country from imminent financial doom.
As I imagine this concept is causing a lot of grumbling, think this through: if you could trade slightly higher taxes and lower defense spending for complete reforms to Medicaid, Medicare, and Social Security (with associated reductions in payroll taxes) that brought the budget into equilibrium in ten to fifteen years, would you take it?
In reality, the question is largely rhetorical, for there's no way Obama, his Party, and his media minions would go for this. But they would all then be thoroughly exposed as having absolutely no interest in actually balancing the budget or solving our nation's pending unfunded liabilities crisis.
This would give the Republican presidential nominee as well as GOP candidates across the fruited plain quite a platform and delineation from their Democrat opponents. It might make it far easier for the right to take back the Senate and the White House next November.
The only downside is that Standard and Poor's would likely downgrade our credit rating once they realized the current President and his Party were not at all serious about deficit reduction, but our AAA status would return once all the profligate spenders were sent back to their respective districts and states to poorly manage their own finances.
Isn't that by itself an end that justifies the means?
As a post-script, those that were really paying attention to the numbers should have noticed that a return to Clinton tax rates and inflation-adjusted spending levels would likely create a greater surplus than just $200 billion. There are liberal estimates out there that the Bush tax cuts cost about $400 billion annually; conservative think tanks place that number somewhere between $100 billion and $200 billion.
Regardless of the outcome, Republicans should insist that any surpluses created by this comprehensive deficit reduction package are to immediately buy back debt, for it's been a long time since something like that actually happened.
The Clinton administration bragged that it was retiring Treasury securities with its surpluses, yet the data show that despite reporting $559 billion worth of so-called black ink from 1998 to 2001, the total outstanding debt in those years still rose by $394 billion.
That's right: there was not one year under Clinton that the total outstanding debt declined. The last time this happened in America was 1957 before most of the current citizenry were born.
Given the explosion in our debt in recent years, and the metaphysical certitude this is going to continue for the foreseeable future, try to imagine the international market reaction to us actually reducing it.
The dollar would scream as would treasury prices resulting in a sharp reduction in long-term interest rates even further stimulating our economy.
Of course, in a global marketplace, having too strong a currency has its downside, but that's a problem that's so far in the future it can be debated another day.
Noel Sheppard is the Associate Editor of the Media Research Center's NewsBusters.org. He welcomes feedback at firstname.lastname@example.org.