Federal policy makers are currently battling multiple problems on the domestic front, prominently including both unsustainable budget deficits and a stubbornly sluggish economy. These simultaneous ills inevitably give rise to divergent opinions on how to prioritize our policy responses. But invoking our 2001 experience to argue for more stimulus, as many have done, fundamentally misreads our current circumstances.
The problems of weak economic performance and of high deficits are closely related. After the 2008 financial market freeze and subsequent recession, federal budget deficits soared and still remain near historic highs. Much of our current counter-cyclical deficit-spending arose automatically under pre-existing federal laws. Whenever the economy sags, tax collections automatically diminish while spending in certain categories (for example, Social Security disability claims) rises. These automatic responses increase federal deficits, embodying a built-in counter-cyclical fiscal policy. As it happened this time around, still more deficit spending beyond these automatic responses was implemented by choice: for example, via 2009’s $800-plus billion stimulus package, via the temporary payroll tax cut enacted late last year, and in other legislation.
Though the efficacy of these automatic and discretionary fiscal stimulus measures has been widely debated, the empirical fact is that federal deficit-spending has exploded while the economy has remained weak.
Throughout this period there has nevertheless been a chorus of advocates persistently calling for still more deficit-spending as a means of stimulating economic growth. These advocates place a relatively lower priority on addressing the untenable accumulation of federal debt; in their eyes the priority problem is that the government isn’t yet providing enough fiscal stimulus. Some have even suggested that those who disagree with this view must either be guided by malicious intent or inhabit an "alternate reality."
Such accusations are all too typical of our national policy debates. But the stimulus debate recently took a further twist when a series of published commentaries argued that many of those resisting additional deficit-spending now are unaccountably reversing positions after having advocated fiscal stimulus through tax relief in 2001. In one recent Washington Post article, for example, those who hold that President Obama’s stimulus package was “ineffective or, at worst, counterproductive,” are described as possibly practicing “voodoo economics”, “at odds” with their own “earlier views.” In support of this characterization, the article quotes prominent conservative economists who spoke in support of fiscal stimulus in 2001.
Another recent column, “Why does the GOP oppose stimulus? Ask a psychologist,” acquits stimulus opponents of being governed by malice, but still explains their stance as reflecting politically-driven “motivated skepticism” rather than legitimate substantive reasoning. This column, too, relies upon quotations from 2001 to depict an apparent reversal of position.
There is in fact no inconsistency whatsoever between favoring tax relief in 2001 and opposing further stimulus spending today. Federal fiscal circumstances in 2001 could hardly have been more different from now. If someone wears a raincoat during a spring shower and later dons snow boots in the wintertime, we do not charge them with inconsistency. When the weather fundamentally changes, different responses are warranted.
To understand comparisons between 2001 and now requires a basic appreciation of the circumstances in which fiscal stimulus is and isn’t appropriate. Fiscal stimulus usually consists of the government’s running increased deficits in an effort to raise near-term economic performance by promoting consumption. It’s important to understand that stimulus spending is not a perpetual motion machine: as an earlier e21 piece explained, it involves the government’s knowingly worsening its net fiscal position – which, all things being equal, will have a negative effect on long-term economic growth – in order to have a positive effect on growth in the near term.
“Stimulus” is not deemed desirable because consumption is inherently superior to saving. To the contrary, saving is generally considered to be a positive contributor to long-term growth. Rather, stimulus legislation reflects a policy decision to alleviate near-term conditions at the expense of some long-term considerations. This value judgment makes the most sense when the long-term fiscal picture is clearly tenable, while in the near term the economy is performing well below capacity.
2001 was a case study in when policy makers gravitate to fiscal stimulus, as shown below in some detail. To present the closest available comparisons across years, I’ll compare FY2001 to FY2011, although most of the 2001 debate played out during that year’s spring, a few months earlier on the calendar than now.
Tax Revenues and Spending: In FY2000, federal revenue collections equaled 20.6% of GDP, the highest since World War II. Revenues dipped slightly in FY2001 to 19.5% of GDP but were still higher than in any year from 1982-1997 inclusive. Spending levels in FY2000-01 were at 18.2%, the lowest since 1966.
Budget Balance: The FY2000 budget surplus was 2.4% of GDP, the largest in more than half a century. FY1998-FY2001 were each rare years of unified budget surplus.
Federal Debt: By the end of FY2001, publicly-held federal debt was 32.5% of GDP, the eighth straight year of decline, and the lowest level since 1982.
Now, not everything was rosy in early 2001. The dot-com bubble had burst and the economy had already hit a rough patch. In a nutshell: policy makers faced a stumbling economy, but at a time when the federal debt was declining, when the budget had been in surplus and when tax collections were at a historic high. Elected officials thus reached the unsurprising conclusion that fiscal stimulus was therefore appropriate and that it should come in the form of tax relief.
How do things compare now, in 2011?
Tax Revenues and Spending: Federal spending in FY2011 is scheduled to be 23.8% of GDP, as it was in FY2010. Along with 25.0% of GDP in FY2009 these are the three highest-spending years as a share of the economy since 1946. Never outside of a world war have we spent so much so fast. This spending well exceeds incoming tax revenues, which are 15.3% of GDP.
Budget Balance: CBO estimates the FY2011 federal deficit at 8.5% of GDP. This follows deficits equal to 8.9% of GDP in FY2010 and 10.0% of GDP in FY2009.
Federal Debt: Debt held by the public is projected to be 67.3% of GDP by the end of FY2011, the highest since 1950 and the fourth straight year of increase. In CBO’s “current policy” (more realistic) projection baseline, this debt will escalate to uncontrollable levels in the upcoming years as the Baby Boomers swell the ranks of Social Security and Medicare beneficiaries.
The following pictures contrast federal finances over the FY2008-2011 period with those over FY1998-2001. Even a cursory examination should make clear that we are in a very different place today. In a nutshell, 2001 was before the government’s counter-cyclical response, whereas 2011 is after a massive one.
By the end of FY2008, just a few weeks before President Obama was elected, publicly held debt was actually a smaller percentage of GDP than it was at the end of FY1998. By the end of fiscal year 2011, it will be over twice (as a fraction of our economy) what it was a decade prior. Our era has simply not lacked for massive debt-financed fiscal stimulus.
Now, one can reasonably argue (though I would disagree) that the fiscal problems created by the last three years of soaring deficits have not yet become critical, and that we should continue to prioritize near-term fiscal stimulus. But clearly, the trade-off is non-trivial between the marginal near-term economic gain of further stimulus spending, and the further worsening of our dangerous fiscal position. And just as clearly, 2001 provides a flawed reference point for this decision at the very least.
Unlike 2001, this is not a moment when, flush with surplus cash, policy makers returned revenue to taxpayers to help head off a recession. Today we are instead already a full three years into a policy of uncontrolled deficit spending, the likes of which America has never seen before.
The bottom line: it’s not 2001 anymore. As policy makers wrestle with our current multiple fiscal and economic challenges, we should avoid making false analogies between conditions in 2001 and those in evidence now.
Charles Blahous is a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center, and the author of Social Security: The Unfinished Work.