Big Spending Republicans

Most voters seem to agree that Mitt Romney would do a better job of taming the debt. He certainly talks a lot about it. During the primary season he said that borrowing money to finance disaster relief would be “immoral” and that such activities should be left to state and local governments or the private sector (not sure how that would work). And his running mate. Paul Ryan, has garnered a reputation as a budget hawk.

But the historical record is not encouraging for deficit hawks.  Republicans have been good at cutting taxes, arguing that the problem is not inadequate revenues but too much spending. Obviously, the next step is to cut spending, but they have done a poor job on that front.

My former Urban Institute and Tax Policy Center colleague Gene Steuerle has put together a fascinating time series of spending change by presidency, measured as a share of GDP.  The chart above shows the data for domestic spending–that is, excluding defense and interest on the debt. Through the Clinton years, the top four presidents are Richard Nixon, Herbert Hoover, Dwight Eisenhower, and George H.W. Bush–all Republicans.

The most fiscally responsible president by this metric is a surprise: Franklin Delano Roosevelt.  Here is Gene’s explanation:

[T]he liberal New Dealer, Franklin D. Roosevelt, is at the bottom of the list. Domestic spending actually fell by 3.6 percentage points of GDP during his tenure. How can this be? The massive World War II defense build-up crowded out domestic spending. … Perhaps more importantly, FDR’s New Deal programs were primarily short-run or counter-cyclical in nature, and focused on unemployment compensation and jobs. Much of the spending was not intended to be permanent [and disappeared when the economy recovered from the Great Depression] … Non-cyclical programs, such as retirement and health, remained quite small. Even at the end of the Truman administration, domestic spending was 1.6 percentage points lower than it had been when FDR took office two decades earlier. Finally, much of the increase in domestic spending in response to the Depression occurred prior to Roosevelt’s presidency, under Hoover.

The only Republican true to stereotype is Ronald Reagan, who cut domestic spending by 2 percent of GDP.  The other big post-World War II spending cutter was Bill Clinton, who cut domestic spending by 0.6 percent of GDP.

Gene also gave me data for George W. Bush and Barack Obama, whose spending records are complicated by the response to the Great Recession.  From beginning to end of President Bush’s term, spending increased by 5.6 percent of GDP. which would give him the all-time lead if included in the chart.  But even if we stopped the clock at the end of fiscal year 2007, before the recession hit, he increased domestic spending by 0.7 percent of GDP.

Through FY2011, President Obama actually cut domestic spending slightly from the very high levels at the end of the Bush administration, and spending has been cut further since then.  Given the slowness of economic recovery, that was probably a mistake, but it certainly suggests that the image of the President as a fiscal profligate is not entirely deserved.

Of course, the effect on the debt depends also on defense, tax revenues, and interest. The chart above shows the debt record of presidents since Eisenhower.  (I exclude FDR, who borrowed heavily to finance World War II, and Truman, who benefited from an enormous peace dividend, because they are both outliers by a wide margin.)  Four of the five biggest borrowers were Republicans.  Ronald Reagan more than made up for his domestic spending cuts with large tax cuts, a defense build-up, and large interest payments on the debt.  President Obama wins biggest debtor honors, by a small margin over his predecessor, because of the combination of large outlays to fight the recession and tax revenues at the lowest level since the Truman Administration.

What lessons can we learn from this history?  If President Obama wins reelection, his domestic spending path is likely to follow FDR’s, declining as the economy recovers. Even if he had dreams of significant new domestic spending programs, it is unlikely that the Republican-controlled House would accommodate them.  Revenues will rebound with the economy and the president has proposed some other tax increases on high-income households.

What if Governor Romney is elected president?  The fear is that he will follow the course of George W. Bush–enact significant tax cuts and then lose interest in the politically challenging work of cutting spending.  The governor has been maddeningly vague about how he’d offset the cost of his tax cuts–which he promises will not increase the deficit–and he’ll have to take on much bigger items on the spending side than Big Bird.  It’s even possible that the bipartisanship he promises will amount to trading spending increases favored by Democrats for further tax cuts, not a good deal for the government’s balance sheet.

I don’t have a crystal ball and it’s possible that Mitt Romney’s fiscal stewardship will live up to his campaign promises. But history suggests that they should be taken with a big dose of skepticism.

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Gov. Romney: Just Release the Tax Returns

Mitt Romney is right that the Democrats’ attack on him for not releasing his tax returns is a diversion from real policy issues that should determine who the next president is, but he’s not going to win this battle and it’s painful to watch it play out in slow motion.

I don’t know why Gov. Romney released fewer tax returns than previous candidates. Possibly he believes that he’s entitled to something like the privacy of ordinary citizens, whose tax returns are completely confidential.  But that would be incredibly naive.  Candidates’ lives become an open book when they decide to run for president and anyone not willing to tolerate that shouldn’t run.

Possibly, he has something to hide. The White House is peddling that line. Washington Post blogger Greg Sargent talked to tax lawyers and economists who said it’s possible that he could have sheltered much of his income from tax using offshore tax havens or other techniques.  University of Virginia law professor George Yin said that you’d expect somebody with a lot of wealth to hire good advisors to minimize taxes, all presumably in compliance with the law. Would it shock and appall the American public to see how that’s done?

It’s remotely possible that Governor Romney avoided US income tax entirely in some years. The IRS periodically looks at the returns of high-income filers who pay no income tax. Some returns are nontaxable in the US, but have foreign income that is taxed abroad at rates at least as high as would apply in the US.  That’s unlikely to be Gov. Romney’s situation.

Among tax returns with no net tax liability anywhere, the most common tax shelter is tax-exempt bonds.  That was the prime factor explaining tax avoidance in 2009 according to the IRS. (See chart.)  But it’s hard to imagine that the former CEO of Bain Capital would be happy with returns of 3 or 4 percent, even if they were tax free, and extremely unlikely that all the various sources of income on the governor’s 2011 return would have been absent in prior years.  Although much has been made of Romney’s lightly taxed capital gains, he had $10 million of income from interest, dividends, and partnerships.

Source: Internal Revenue Service,."High-Income Tax Returns for 2009," SOI Bulletin, Spring 2012. (Public Domain)

Taxpayers can reduce tax liability through charitable contributions, but they can’t eliminate it.  If Romney avoided income tax altogether, my guess is that his partnership holdings generated large losses.  That was the most important factor on 5.7% of nontaxable returns in 2009.

There might be a hint on the governor’s 2010 return.  In that year, the Romneys reported a $280,000 partnership loss.  In 2011, the partnerships produced income of over $2 million.  Was this the end of a process where the partnerships were converted from tax shelters into income generators–possibly in anticipation of the scrutiny that would accompany the Romney tax returns when he became a candidate? Who knows?

Of course, there’s also the $10 million of capital gains on the Romneys’ 2011 return ($5 million in 2010). It is fairly easy to avoid paying tax on capital gains if you are wealthy.  Don’t sell assets with gains.  When you have to sell assets with gains, also sell some with losses so your net gain is close to zero. It’s possible that the capital gains that played so prominently on the Romneys’ released returns are largely absent in earlier years.

It’s also possible–even likely–that seeing the returns would not tell us that much.  If much of the income is parked in offshore entities, it might not be reported at all on US income tax returns until those entities pay a dividend.

But assuming that whatever the Romneys did was legal, it’s hard to imagine that his tax returns could be more damning than the speculation surrounding their suppression.  Mr. Romney is rich and he doesn’t pay much tax.  We already know that.

Is it possible that the earlier returns would reveal some real chicanery? That seems extremely unlikely. As Romney supporter Michael Gersonpointed out, “Romney — though he has his weaknesses as a candidate — does not fit the part of a sleazy businessman or a Nixonian liar.”

When your supporters are saying that you’re not a Nixonian liar (great bumper sticker), it is time to change the narrative.  Release the returns and let’s move on to the real debate.

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Obama is a Lightweight in the Intimidation Game

Republican leaders are outraged that the president is trying to "intimidate" the Supreme Court into supporting his health reform law. It is an election year so hyperbole and feigned outrage are to be expected, but if the GOP wants to find politicians engaging in intimidation, they should look in the mirror.

First, let't look at what the president said, as reported by Fox News:

"I'm confident that the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress," Obama said. "And I'd just remind conservative commentators that for years what we've heard is the biggest problem on the bench was judicial activism or a lack of judicial restraint, that an unelected group of people would somehow overturn a duly constituted and passed law. Well, this is a good example. And I'm pretty confident that this court will recognize that and not take that step."

But exactly how does the president intimidate the Supreme Court? The president can't do anything to the Supreme Court if it displeases him. Supreme Court Justices have lifetime tenure. Do the critics worry that Justice Kennedy or Roberts would change their votes because they didn't want to disagree with the president? Whether or not the president opined on the subject, could the Justices have any doubt about what the president's views are? The president's solicitor general did have three days to make the president's case directly to the Supreme Court, rather than to reporters in the Rose Garden.

But the talk of intimidation did remind me of a much more egregious case back in September, when the Republican leadership sent a letter warning Fed Chairman Ben Bernanke and the Fed governors not to engage in any more quantitative easing.

It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.

Ezra Klein of the Washington Post summarized the message as "Nice central bank you got here. Shame if something should happen to it." This is real intimidation. Congress can legislate limits on the Fed's autonomy and hold up confirmation of appointees to the Board of Governors. Fed governors do not have lifetime tenure. They must routinely testify before Congressional committees. The Republican leaders' warning had real teeth.

And there's also one more meaningful difference between the two episodes. Messrs. McConnell, Boehner, Kyl, and Cantor are professional pols with no training in economics or monetary policy. They have no business lecturing Ben Bernanke, a distinguished scholar with a fabulous reputation in the profession, on economics.  Barack Obama taught constitutional law at University of Chicago, one of the best law schools in the country.


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