Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate.
High among the many priorities of newly-inaugurated US President Joe Biden are the challenges of an economy that appeared to be slowing down as 2020 ended, with the latest employment numbers looking bleak. A fourth-quarter slowdown in the US recovery from the horrendous second quarter could be attributed to the expiration of some of the bipartisan stimulus programs that were passed by Congress in March of 2020, or to the third wave of Covid-19, or to both factors. Even if Covid-19 abates during the course of 2021 and pent-up consumer demand then kicks in, the US faces challenges right now, in such areas as schools, infrastructure investment, state and local finances, and especially the fight against the pandemic itself.
Biden has announced a $1.9 trillion “American Rescue Plan.” That includes a $20 billion national vaccine program, $50 billion to expand testing, and $100 billion to help schools re-open safely. He wants to help cities and states hard-pressed by the crisis and to support those who can’t work due to the pandemic. On a more permanent basis, he wants to invest in infrastructure and education and to extend health insurance coverage to those not already reached by the Affordable Care Act.
He is rare among successful presidential candidates in having been honest during the campaign that his spending would continue the trend of record budget deficits, notwithstanding his plans also to raise taxes on the wealthy. Most economists approve of this fiscal expansion, in light of still-high unemployment, low inflation, and very low interest rates.
It is expected, however, that because a Democrat has been elected president, many Republicans will now switch from four years of indifference to budget deficits (even when unemployment was far lower) to a sudden rediscovery of their dangers. Observers recall that the Republicans have done this before, most recently in 2009. That was the last time when a new Democratic administration took the reins in the midst of another inherited crisis — Barack Obama and Vice-President Biden, as it happens.
But it is worth pointing out that the pattern goes back a full 45 years. Republicans oppose deficits only when, and only when, Democrats hold the White House
The history features three long cycles, each cycle alternating fierce Republican opposition to deficits with a reversal when they come to power: (1) the 1980s, (2), 1990-2008, and (3) 2009-2020.
Consider the three cycles in chronological order.
- The Administration of President Jimmy Carter in the late 1970s ran budget deficits, as most of its predecessors had done. Ronald Reagan in his 1980 presidential campaign attacked the deficits. Notwithstanding the 1980 and 1981-82 recessions, he warned that the accumulated national debt was approaching $1 trillion and said there was an urgent need to start bringing it down, to act “beginning today,” which arithmetically would have meant running budget surpluses.
- With Reagan in the White House in 1981, he and a Republicans Congress launched a three-year program of extensive tax cuts. They did not propose net cuts in spending (but, to the contrary, expanded the military budget). As a result, the US began to run record budget deficits. These deficits tripled the national debt to $3 trillion by the time Reagan left office and quadrupled it to $4 trillion by the time his successor left office. Even after the US economy had fully recovered from the recessionary years of 1980-82, George H.W. Bush in his famous speech in 1988 accepting the nomination to be Reagan’s successor, appeared unconcerned about the budget deficit: “read my lips, no new taxes.”
- Bill Clinton did not campaign against the budget deficit, but once in office, he was persuaded to make fiscal responsibility a priority.
- In 1993, Republicans in Congress uniformly voted against Bill Clinton’s PAYGO (“Pay As You Go”) plan, which was to achieve a path of steady deficit reduction. (Under PAYGO, anyone wishing to cut a tax or raise spending had to propose an offset somewhere else in the budget.) The Republicans, led by House Speaker Newt Gingrich, predicted that the plan would result in slower growth and larger deficits. Instead, the 1990s economic recovery achieved historic length, unemployment fell below 4%, and the budget went into surplus by 1998-2000. Nevertheless, the opposition party continued to oppose Clinton’s fiscal policies, which included a plan to refrain from spending the surpluses until social security was funded.To give credit where credit is due, the PAYGO plan was actually a continuation of the policy that the first President Bush had initiated in alliance with Congressional Democrats in 1990. Many in the GOP never forgave Bush for his apostasy regarding taxes.
- His son, George W. Bush, took up occupancy in the White House in the first month of the new millennium. He let the PAYGO provisions expire. In 2001 and again in 2003, he instead followed the Reagan playbook by enacting big tax cuts (reducing taxes on dividends and capital gains and lifting the estate tax even for the wealthiest). Bush also raised federal spending during his first term, at four times the rate that Clinton had, not just defense spending, but domestic spending as well (including, for example, subsidies to farmers and fossil fuel producers). Even with unemployment falling below 5% in 2005, he did not listen to warnings that to run large budget deficits during a period of economic recovery might leave less “fiscal space” with which to respond to the next recession or crisis. His Vice President, Dick Cheney, reportedly said, “Reagan showed that deficits don’t matter.” Another $ 4 trillion was added to the national debt during the two Bush terms.
- A housing finance crisis led to recession in December 2007. By the time Obama took office in January 2009, the economy had descended into free-fall. No Republican congressperson voted for Obama’s Recovery Act, even though the economy was in its worst recession since the 1930s. After re-taking the majority in Congress in 2011, they succeeded in blocking continuation of the stimulus, despite an unemployment rate that was still 9 percent. A look at the timing supports the proposition that the stimulus turned around the economy in the first half of 2009 and that its curtailment after 2010 slowed the subsequent recovery. Candidate Donald Trump attacked Obama’s deficits. He said he would balance the budget “quickly” if elected president. He even claimed during the 2016 campaign to be able to eliminate the national debt. That would have required budget surpluses averaging more than $2 trillion per year over 8 years.
- In this perspective, the new president predictably pursued the policy path of the predecessors of his party. As Reagan had done in his first year in office and Bush in his, Trump and his co-partisans in Congress passed a tax cut in 2017 that was projected to cost $1.9 trillion over ten years, overwhelmingly benefiting the rich. They increased spending too, even though the economy was at the peak of the business cycle. As a result, the budget deficit surpassed $3 trillion in 2020 (more than double the previous record). The national debt at $22 trillion is now poised to exceed 100% of GDP. The only time this has happened before was at the end of World War II.
4. What next?
The US is now starting the fourth cycle. All signs point to the desirability of large-scale federal borrowing at record-low interest rates, to be spent on worthy causes ranging from the short-term (immediate federal leadership to defeat the coronavirus) to the long-term (investment in infrastructure and education). With a razor-thin majority in the Senate, Biden is in a position to get things done. But if history is a guide, the other party will fight spending proposals every step of the way and thereby work to slow the recovery in American economic and physical health… until it is once again their turn in the White House.
This post written by Jeffrey Frankel.