July 26, 2002
Ancient History: The Deficits of the 1980s

Some ancient history: a Treasury Department memo from my files.

June 17, 1993

MEMORANDUM FOR ASSISTANT SECRETARY OF THE TREASURY ALICIA MUNNELL

From: J. Bradford DeLong, Deputy Assistant Secretary
Subject: Origin of the Deficit: "Presidential" or "Congressional"?

SUMMARY: The overwhelming proportion of the deficits of the last decade [i.e., the 1980s] were already proposed in President Reagan's and President Bush's original budget submission. There was no explosion of federal spending over and above what the presidents had asked for. More than four-fifths of the 1980s deficits were "presidential." Less than one-fifth were "congressional."

DISCUSSION: For ten years the United States government has run annual budget deficits of more than two-hundred billion dollars a year. These deficits have placed a substantial burden on and slowed the growth of the American economy: had the budget been balanced over the past twelve years, and had the money that the government has borrowed to finance the deficit instead been invested in the United States, average American workers would have seen their incomes grow faster over the past decade, and their incomes would now be higher by an extra $3,000 or so.

If you listen to Republicans, you might think that the Republican administrations of the past twelve years have played little role in the deficit. They claim that high deficits exist because Congressional Democrats have spent the past decade funding new programs and busting agreed-upon spending limitations. A typical version of this claim comes from former Reagan staffer Martin Anderson, who writes:

[W]e don’t [have a balanced budget] because those with the real power to decide… have consciously and deliberately decided to unbalance the federal budget.…[T]he real culprit in federal spending is the Congress.…The president may propose the… budget…but it is the Congress that disposes.…Time and time again [the] president…sent budgets to the U.S. Congress to limit and control federal spending. Time and time again, the Congress has rebuffed those plans, and substituted levels of spending they, and they alone, considered appropriate...

In the world Anderson lives in, sober and realistic executive-branch Republicans who send realistic budgets to Capitol Hill are powerless in the face of a Congress that knows no restraint:

Under current arrangements, the president must submit his budget proposals to the Congress, which can then add or delete as it wishes. What it deletes cannot be put back by the president, but deletions are rare these days. The Congress is much better at adding…

Are Martin Anderson and company telling the truth? No.

To see that Anderson's claims are false, compare the cost of the spending plan first proposed by the president in his annual budget submission to the actual level of spending from the appropriations bills that Congress actually passes. Assign to congress this part of the deficit--this "congressional" deficit. The remainder--the difference between tax revenues and the spending level the president had proposed in his budget submission--is the "presidential" deficit. Figure 1 shows both the actual deficit and this "presidential" deficit. Both are scaled by the total size of the economy: they are measured as percentages of Gross Domestic Product (GDP)--the market value of all goods and services produced within America’s boundaries.

Figure 1: "Presidential" and Total Deficits as Shares of GDP

In figure 1 the "presidential" and actual deficits are almost the same. Had the Congress been a rubber stamp and taken no action to change the president’s budget at all, the 1982–91 years would have seen total budget deficits more than ninety percent as large as actual deficits. Figure 1 shows us that the federal government has not run large budget deficits over the past decade because "Congress…rebuffed" presidential plans to control federal spending. Instead, the large deficits have been there from the beginning in presidential spending plans.

Figure 2: "Presidential," "Congressional," and "S&L" Deficits as Shares of GDP

A different view of the same underlying numbers—a view that leads to the same conclusions—is to graph the "presidential" deficit not against the actual deficit but against the "congressional" and "S & L bailout" deficits. Define the "legislative" deficit to be the difference between the actual level of spending carried out and the level proposed by the president. And define the "S & L bailout" deficit to be the cost of S & L bailout activities. Figure 2 shows that the other two components of the deficit are small relative to the "presidential" component. The "presidential" component varies between two and a half and six percent of GDP. After 1981, the "congressional" deficit never reaches even one percent.

Either way, the conclusion is the same: the U.S. has had large budget deficits over the past decade not because Congress has rejected presidential spending restrictions, but because large budget deficits have been implicit in every single year’s presidential spending plan. Congress has largely played a passive role: delivering by and large the level of spending that the president proposed.

You can fault Congress in the 1980s for many things—for playing this passive role, and playing along with the executive branch. But you cannot fault Congress for creating the deficit: it has not added program after expensive program to fiscally-responsible executive branch proposals, but almost exclusively confined its activities to swapping spending from one category to another.

Posted by DeLong at July 26, 2002 02:32 PM | Trackback

Email this entry
Email a link to this entry to:


Your email address:


Message (optional):


Comments

I LOVE this memo. I've made exactly this argument myself on many occasions, but supported only with generalities (e.g., the observation that during the period 1981 to 1986 inclusive, the U.S. Senate was controlled by the GOP, meaning that NOTHING Congressional Democrats tried to do on the budget really could happen without jumping at least some major Republican hoops, nevermind the White House and such niceties as presidential vetos).

Here, you provide actual hard evidence. There's a great deal more that could be said, of course, but this is really good stuff. Thank you!

Posted by: Roger Keeling on July 28, 2002 06:06 PM

And yet here is Jeff Jacoby making these same tired arguments you've so thoroughly discredited.
Sigh.

http://www.boston.com/dailyglobe2/206/oped/Bring_back_Reagan_s_Rx+.shtml

Posted by: Lee on July 29, 2002 10:12 AM

Don't you guys realize that the Reagan deficits were the cause of the '90s boom ?

Posted by: xian on February 9, 2003 10:38 AM

To be fair, I note the memo was written by a Clinton appointee very early in the Clinton administration. Also note that the memo makes no reference to the circumstances of the economy inherited from Carter. The need for change was very clear: the nation was suffering double digit inflation and the future looked very bleak. Congress was deadlocked, fearing that deficit spending would trigger even higher inflation.

My own observation at the time was that Reagan was deliberately orchestrating a trainwreck with the Democrats, expecting them to blink at the deficits and cut spending for social programs. He viewed such programs as NOT rightfully the responsibility of the FEDERAL government. He went after two targets with his heavy military spending: the USSR and welfare reform (in the broadest sense). He scored a bullseye on the first, ending the Cold War, and an equally big miss on the second, creating huge deficits.

Thankfully, Clinton, with the help of the Republicans, was able to follow through on the welfare reform (in the narrowest sense). With the help of the booming economy, other social programs were held in check as needy people were able to find work and take care of themselves. The legacy of Reagan's lower taxes certainly contributed something to the boom times of the 1990s.

Unfortunately, too much of the boom turned out to be hype: Internet bubble, year-2000-bug spending, "irrational exuberance" and some downright fraud. The economy is now sorting that out.

For a balancing argument see:
http://www.intellectualconservative.com/article2132.html

Note: I do not argue against the facts in the memo. The Reagan/Bush budget proposals were not balanced. They could not afford the political damage that would result from Democrats pointing to Republican proposed cuts in social programs. Rather, they spent on what they viewed as important and hoped the Democrats would propose across-the-board cuts in support of a balanced budget. The result would then be the best of both worlds: shared responsibility between the two parties.... the conservatives would get less military funding than desired and the liberals would get less social funding than desired. Democrats held their ground, however, resulting in excessive spending on both sides of the debate.

Suggestion: for the future, both parties should restrain spending on their priorities and lower taxes. The real surprise in the 90's was how well a booming economy can wipe out deficits! We should all work toward stimulating the economy as much as possible. This seems to be the shortest road to helping the needy AND the wealthy... it is NOT a zero-sum game!

Posted by: Charles Flink on May 23, 2003 08:57 AM
Post a comment
Name:


Email Address:


URL:


Comments:


Remember info?