David R. Henderson  

Henderson on the 1990s Budget Cuts

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Escobar's Dilemma... Two concepts of "austerity"...

My latest Mercatus study, "U.S. Federal Budget Restraint in the 1990s: A Success Story," was published last week. In it, I detail how, in a bipartisan way, Congress and the President cut government spending substantially as a percent of GDP in the 1990s.

This follows on my earlier work for Mercatus on how the Canadian government cut government spending as a percent of GDP from the mid-1990s to the mid-2000s and my work on how Congress and President Truman cut government spending as a percent of GDP after World War II.

An excerpt:

In 1990, government spending on programs and interest on the federal debt was 21.9 percent of GDP. By 2000, as figure 1 shows, it had fallen to 18.2 percent of GDP, a reduction of 3.6 percentage points. That amounts to a substantial 17 percent reduction in the share of GDP spent by the federal government. While this is a more modest reduction than that achieved by the Canadian government, a one-sixth reduction in the government's share of GDP is economically significant.

What about the idea that the reason this fraction fell is that the numerator, GDP, grew so much more in the 1990s than in other decades? Wrong. I wrote:
So far I have not focused on the denominator, that is, GDP. I do so now. The period from 1990 to 2000, even though it included a small recession that began in 1990, was one of substantial growth. Between 1990 and 2000, real GDP grew from $6.708 trillion to $9.191 trillion. That amounts to an annual average growth rate of 3.2 percent. That is a quite healthy growth rate for an economy that is not catching up to the rest of the world.

But it is not spectacular growth. To put that growth rate in perspective, the average growth rate of real GDP between 1959 and 1990 was actually higher, at 3.5 percent. The growth rate between 1980 and 1990 was also 3.2 percent. And even the growth rate from 1970 to 1980, not generally thought of as a high-growth decade, was the same 3.2 percent achieved in the 1990s.


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COMMENTS (4 to date)
Jon writes:

I recall looking at the 1980s budget deficit in real terms, population adjusted and the shocker was how effective the early budget control acts were on that basis.

That story was completely lost in the backdrop the rapidly growing population and high inflation of the time.

JLV writes:

The fact that political polarization isn't mentioned in the article seems like a big omission. The cuts in spending occurred in the beginning of the 1990's, when more than half of the Republican house caucus was "centrist" (DW-Nominate score below 0.25). Less than 20% of Republicans are centrist now.

Bipartisan cooperation on budget consolidiation might have been possible in 1993, but your suggestion that it might be possible in the future seems to require a Republican party that moves rather swiftly to the center. I see no such eventuality occurring with p>0, but I'm just a guy on the internet.

(Data on ideology and polarization here: http://voteview.com/political_polarization_2014.htm)

ThomasH writes:

I'm agnostic about whether government spending (including transfer payments and departures from uniformity in the corporate income tax) ought to be a higher or lower portion of GDP. It is easy to think of areas where transfers should be higher -- the EITC -- and expenditures should be lower -- DOD-DHS-NSA. Setting out to raise or lower that ratio seems like a poor way to think about tax and expenditure reform. Decisions ought to be made on the margins looking at the costs and benefits of each tax and expenditure item.

David R. Henderson writes:

@JLV,
The fact that political polarization isn't mentioned in the article seems like a big omission.
Could be.
The cuts in spending occurred in the beginning of the 1990's,
Actually, they occurred throughout the 1990s with cuts toward the first half of the 1990s, but your “beginning of the 1990s” is too strong.
when more than half of the Republican house caucus was "centrist" (DW-Nominate score below 0.25). Less than 20% of Republicans are centrist now.
And yet a big part of the story I tell is that the Republicans restrained Clinton on domestic spending--that’s the “dog that didn’t bark” part of the paper. So it’s hard to see how Republican “centrism” was a big factor.
Bipartisan cooperation on budget consolidation might have been possible in 1993, but your suggestion that it might be possible in the future seems to require a Republican party that moves rather swiftly to the center. I see no such eventuality occurring with p>0, but I'm just a guy on the internet.
I think you could make a better case, given where the cuts would need to come (as I point out in the paper, many of them would need to be domestic spending cuts) that it’s the Democrats that would need to move to the center.
The main point of the paper, though, is not the political analysis part. It is, rather, that this happened and that virtually no one is talking about it and everyone who cares about spending should be.

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