If our nation fails to get its fiscal house in order, every sector of the economy will experience negative impacts, but the supply chain will be particularly hard hit. With four years of trillion dollar plus annual deficits and over $16 trillion in national debt there is now a heated debate about the extent to which we have a spending problem or a revenue (tax) problem. The data suggests we have both but that the spending problem is far greater than the revenue problem. In addition, anemic economic growth, not the Bush Tax Cuts, are the reason for the revenue slow down.
Let’s start with spending. From Reagan’s first term through Clinton’s second term the federal government increased annual spending by $200 to $280 billion from one administration to the next regardless of which party held office. Clinton turns out to be the spendthrift of the bunch only increasing annual spending from $1.5 trillion to $1.7 trillion in his second term. Spending over the last 12 years has spiraled out of control. In Bush’s (43) first term he increased annual spending by $396 billion and in his second term he beat that by increasing annual spending by $628 billion. From Clinton’s second term to Bush’s second term annual federal spending increased by over $1 trillion, from $1.7 trillion to $2.7 trillion. Not to be outdone, in Obama’s first term annual spending increased by $884 billion resulting in annual spending of $3.6 trillion, more than double the level of Clinton’s second term. Is anyone spending twice as much per year as they did in 2000? This is not a Democrat or Republican issue. Both parties are complicit in doubling annual federal spending over a 12 year period.
The revenue side of the equation is more complicated. The Reagan tax cuts (1981 and 1986) did not drain the treasury as many complained nor did the Bush (41) tax increases result in a federal windfall of revenue. In fact from Reagan’s first term through Clinton’s first term, annual revenues increased by $187 to $262 billion from one administration to the next. The revenue increases were not much less than the spending increases and average annual deficits were in a tight range of $150 to $233 billion. Then things got interesting. In Clinton’s second term annual revenues surged by almost $500 billion per year from $1.3 trillion to nearly $1.8 trillion as the dot-com boom/bubble boosted tax receipts. Note that this revenue surge followed the 1997 Taxpayer Relief Act which cut the capital gains tax rate from 28% to 20%. We ran a federal government surplus for four years (the last of which was under Bush). In Bush’s first term despite the dot-com bust, 9/11, a short recession, and two rounds of tax cuts (2001 and 2003) annual revenues still increased by $88 billion – modest by DC standards. Far from starving the federal government of tax revenues, the Bush tax cuts paved the way for his second-term recovery that saw tax receipts increase by over $500 billion per year, from $1.9 trillion to $2.4 trillion annually, in spite of the 2008 recession when real GDP dropped by 0.3%. As already pointed out, rather than pay down debt with that revenue windfall, we spent it. That brings us to Obama’s first term where revenues actually declined by $153 billion per year. Declining GDP in the first year, weak corporate tax receipts and a decline in Social Security receipts were major factors, not the Bush tax cuts that led to record tax revenue in his second term. By the end of Obama’s first term, FY 2012 federal tax receipts had recovered to $2.5 trillion.
Under Obama’s first term average annual deficits increased by $1 trillion; from $0.3 trillion under Bush’s second term to $1.3 trillion per year under Obama. For the full four year term that is $5.3 trillion in deficits and incremental national debt. Comparing Obama’s first term to Bush’s second term, we increased spending by $884 billion per year and saw revenues decline by $153 billion per year – $6 of extra spending for every $1 dollar of lower tax receipts. Clearly, we have much more of a spending problem than a revenue problem but we do have a revenue problem. The recently passed 10-year $650 billion tax increase will not begin to reduce our deficits. If nobody changes their behaviors and there is no economic damage done by the tax hikes – both extremely unlikely – we will have solved less than 5% of our annual deficit problem – $65 billion out of $1.3 trillion.
The solution to more revenue is a stronger economy. While the relationship is not perfect, the best economic growth period since 1980 was Clinton’s second term when real GDP grew at 4.4 percent per year which produced the second highest increase in receipts, the lowest increase in spending, and a balanced budget. The greatest increase in annual revenue was Bush’s second term despite the second slowest economic growth since 1980 and two rounds of Bush tax rate cuts. The growth came in the first 3 years of that term while real GDP was growing at a 2.5% annual rate and personal, corporate, and Social Security tax receipts were all increasing at a rapid pace even with no increase in tax rates. The rising tide does lift all boats increasing tax receipts and at least providing an opportunity to cut spending as unemployment falls and incomes rise.
The tax package that averted the fiscal cliff does nothing to stimulate economic growth. Higher tax rates on capital gains and on income for businesses like Transplace that are not C corporations – and thus pay taxes at the now higher individual tax rates – will leave less after tax cash flow to invest in growth as well as less incentive to take the risks that all businesses need to take in order to accelerate growth and improve our nation’s dreadful unemployment rate.
Slow economic growth, trillion dollar annual deficits, stubbornly high unemployment, $16 trillion in debt, and tax hikes on small businesses and job creators negatively impact our nation’s supply chain. Our highways and bridges need to be repaired, but we are broke and few believe a gas tax hike is possible and even fewer believe that if federal gas taxes were hiked the money would be effectively spent fixing our critical highway infrastructure. Eventually our debt and monetary easing will lead to higher interest rates and inflation, driving up the cost holding inventory and transporting goods. Will truckers be able to afford and willing to take the risk of buying trucks and hiring drivers? The stunning increase in federal spending and the resulting national debt hang like an albatross around the neck of our economy. America has weathered tougher storms in our 237-year history. When we have needed it the most, a great leader, or team of leaders, has always emerged to get us on the right path. Who will step up now?