When conservatives talk about opposing the expansion of Big Government, this usually means lower taxes, lower spending, and reducing regulations. In two of out of three (taxes and spending), the Republican Congress should get more credit for stopping most of President Obama’s agenda of expanding the size and scope of the federal government.
In his 2015 book End the IRS Before It Ends Us, Grover Norquist argued that President Obama suffered two great defeats on taxes and spending.
President Obama could have let the Bush tax cuts expire after getting re-elected in 2012. If the tax cuts expired, taxes would have gone up by $5 trillion over the next ten years. Speaker John Boehner had no leverage, but thankfully President Obama offered to keep the Bush tax cuts for people making less than $250,000 a year. This would have preserved 82 percent of the Bush tax cuts for 98 percent of Americans.
In the end, the Senate Democrats raised Obama’s initial offer to make the tax cuts permanent for individuals making $400,000 a year and $450,000 for joint filings. The Republican Congress managed to save 85 percent of the Bush tax cut for 99 percent of Americans.
According the Office of Management and Budget (OMB), from 1930 to 2015, federal spending, as a percentage of GDP, reached its peak at 42.7 percent in 1944. After the war, federal spending, as a percentage of GDP, declined rapidly from 41 percent in 1945 to 24.2 percent in 1946. From 1947 to 1974, federal spending remained below 20 percent of GDP every single year.
From 1975 to 1995, federal spending remained above 20 percent of GDP in every year but 1979 (19.6%). In those years, the highest year in terms of spending was 1983 (22.8%).
From 1996 to 2007, federal spending was below 20 percent every year. Spending reached its nadir at 17.6 percent of GDP in both 2000 and 2001. We had a surplus in both years because revenues, as percentage of GDP, exceeded the relatively low spending.
In 2000, revenues were equivalent to 20 percent of GDP. The last time revenues were that high was in 1944 (20.5%). In 2009, revenues, as a percentage of GDP, collapsed to 14.6 percent while spending soared to 24.4 percent of GDP.
Thanks to the 2011 Sequester, according to Norquist, federal spending, as a percentage of GDP, declined from 24.4 percent in 2009 to 20.4 percent in 2014. In 2015, revenues (18.3%) and spending (20.7%) were returning to the historic averages since World War II.
While spending has relatively gone down, President Obama has nearly doubled the national debt from $10 trillion in 2008 to $18 trillion in 2015. With the growth of entitlement spending, the pressure for spending to rise will only continue in the coming years. If Congress has any chance of keeping its promises to retirees, we need our government to spend more efficiently to compensate for the growth in entitlement programs.
We also have to restore GDP growth beyond the “new normal.” According to the Bureau of Economic Analysis, from 1950 to 2000, the average annual growth in real GDP was 3.7 percent. From 2001 to 2015, annual real GDP growth has averaged only 1.8 percent.
In his most recent book, The Map and the Territory, former Federal Reserve chairman Alan Greenspan dedicates two chapters to explain how the growth in federal spending is responsible for the decline in productivity growth, which reduced economic growth. According to Greenspan, the share of GDP in capital investment declined from approximately 25 percent in the late seventies to only 18 percent by 2009.
With less capital investment, productivity fell. The country’s gross domestic savings (government, businesses, and households) declined from 22 percent of GDP in 1965 to 12.9 percent in 2012 because Social Security and other social benefit programs increased from 4.7 percent of our GDP in 1965 to 14.9 percent in 2012.
The President’s Council of Economic Advisors reported in 2015 that low productivity growth was far more responsible for the middle class squeeze than income inequality. From 1948 to 1973 labor productivity growth averaged 2.8 percent annually as labor force participation was growing. From 1973 to 1995, productivity grew at only 1.4 percent a year. With rise of the Internet and other technologies, from 1996 to 2005, productivity annually grew above 2 percent. Since 2011, productivity has been consistently below 1 percent.
Along with spending, the uncertainty created by new regulations has undermined investor confidence. Greenspan writes in The Map and the Territory that the best indicator in investment confidence is “the proportion of liquid cash flow that nonfinancial corporate businesses choose to commit to difficult-to-liquidate equipment and structures — the ‘cap-ex ratio.’… In 2009, that ratio had fallen to the lowest peacetime annual level since 1938.” People need confidence to invest in the future. Uncertainty is killing that confidence.
That is why we need a predictable system of regulations. From 1949 to 2015, the number of pages in the Code of the Federal Regulation grew from 19,335 pages to 178,277 pages. Stopping unnecessary regulations requires Congress to either pass legislation to end a regulation. With a presidential veto threat, attempts to stop regulation usually fail.
To provide more certainty in the markets, Congress should pass the Regulations From the Executive in Need of Scrutiny (REINS) Act. This would require Congress and the President to affirm any federal rules with an economic impact of $100 million or more before they could be enforced against the American people.
Members of Congress should not hide behind liberal bureaucrats. If they feel new regulation is necessary, they must be on record voting for it. Beyond limiting the growth of regulations, we should seek to reduce the regulatory burden using the Congressional Review Act. This law is rarely used because divided government makes the bill useless. A Republican Congress will not pass a resolution of disapproval because it will just result in a veto from President Obama.
President Obama has had some significant victories in expanding government during his presidency, especially in the first two years. The most high profile victory was passing the Affordable Care Act in 2010, for which he and his party have paid a high political price.
After a Republican Congress was elected in 2010, the president was forced to play defense. The Republicans have largely won the fight on taxes and spending. The administration, however, continued to expand government through regulation. This is where further opportunity awaits Republicans, if they summon the courage. They will need to retain control of Congress to hold the line on taxes and spending. Regulations, the Supreme Court, and reforming government will require Republicans to control both the White House and the Congress. We’ll know more after November 8.