Leadership is important, but even the president of the United States has less of an effect on the economic fundamentals of a large, diverse nation like ours than you might think. And individual members of Congress, even leaders like the speaker of the House, make virtually no difference, despite what former Speaker Newt Gingrich says.
A reader had asked about Gingrich’s assertion that he was responsible for Mitt Romney’s wealth because the former Speaker, with a little help from Ronald Reagan, had “profoundly changed the entire trajectory of the American economy.”
Other readers had inquired about a recent letter to the editor asserting that the U.S. federal budget had been some 19 percent of gross domestic product until
President Barack Obama leaves after speaking in the briefing room of the White House in Washington, Friday, Oct. 21, 2011, where he declared an end to the Iraq war, one of the longest and most divisive conflicts in U.S. history, announcing that all U.S. troops would be withdrawn from the country by year’s end. (AP Photo/Evan Vucci) (Evan Vucci)President Barack Obama raised it to 25 percent and that unless it was quickly returned to 19 percent, our country would find itself in the same situation as Greece.
The truth is more complex and much less dramatic.
Start with the size of government over time. The letter writer was correct in that over the half-century of fiscal years from 1958 through 2008, federal outlays totaled 19.7 percent of GDP. And, in three fiscal years of the Obama administration, the average is 24.6 percent.
Look at the numbers more closely, however, and the picture is not so stark. Over the 1980s, government outlays already averaged 21.9 percent of GDP. And the last budget year of the George W. Bush administration saw spending of 24.3 percent. So while the outlays of the current administration are at historic highs for peacetime, they are not much above what most accepted complacently in the 1980s, nor are they much of a jump from the end of the prior one.
All of this is predicated on the assumption that presidents determine spending. They certainly have some power. They send budget proposals to Congress, where they are ritually proclaimed “dead on arrival.” They can veto appropriations bills they don’t like. Skilled politicians like Lyndon Johnson and Ronald Reagan can use their influence with key members of Congress to help get what they want.
One can thus blame or credit Johnson for much of the increase in social spending in the 1960s and Reagan for much of the higher defense spending in the 1980s.
But other factors enter in. Both Reagan and Obama took office as the nation was moving into a severe recession. In both cases, the new president had virtually no involvement in causing the recession. In both cases, the Federal Reserve played a primary role. In 1981, it was a triumph of fighting inflation. Unfortunately, 2009 represented a failure both of monetary policy and of banking supervision.
Thus, in the first years of both these administrations, there were sharp increases in outlays for unemployment compensation, food stamps, Medicaid and other entitlement programs in which spending automatically increases as the economy slows and decreases as it prospers. These programs were set up by presidents and Congresses well before either Reagan or Obama was elected.
Similarly, interest outlays on the national debt rose sharply in the 1980s. Some of this resulted from the tripling of the national debt over that decade. And the large budget deficits causing that debt increase were due in great part to the increased defense spending and tax cuts that were the hallmarks of Ronald Reagan’s agenda.
But in its fight to kill inflation, the Paul Volcker-led Federal Reserve pushed interest rates on new 30-year Treasury bonds as high as 14 percent. That also drove up the cost of servicing the national debt. Even if the debt had stayed at the low point, relative to GDP, that it had reached in 1980, interest outlays still would have increased markedly in subsequent years.
Whether there was some sort of profound change in the trajectory of the U.S. economy after Gingrich is not nuanced. It is simply preposterous to anyone who has spent any time looking at actual data. There was no long-run increase in the rate of GDP growth nor in productivity. Inflation has been lower than in the 1970s, but that is due entirely to the Fed.
Unemployment was lower than usual in the 1990s, but higher in the 1980s themselves and after 2001.
The primary long-run change was in the trajectory of the national debt. Relative to GDP, it had fallen from the end of World War II to 1981. From then on it rose, except for fiscal years 1997-2001, after which it rose again. Also, the U.S. personal savings rate declined sharply over the last 30 years. And yes, income distribution has become more concentrated. But none of these, good or bad, were brought about by the speaker of the House.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.