In Politico’s The Arena section today, David Brooks’ column chastising the bulk of GOP Congressman for their unwillingness to accept reasonable proposals was the topic of discussion. Grover Norquist, the discussion’s first respondent, declares that David Brooks is mistaken and claims that policies like those endorsed by Brooks, Richard Darman, and George H.W. Bush (i.e. willingness to raise taxes with the idea that they will actually raise revenue and reduce deficits) are necessarily anti-growth.
Norquist states, “The tax hikes were real and painful. A recession followed. And government spending went up faster than it was projected to increase before the ‘deal.’ Spending got worse, not marginally better. And the deficit got worse.” Interestingly enough, however, Grover Norquist is not really telling the truth.
George H.W. Bush’s famous (or infamous, depending on one’s point of view) increase to taxes (and reversal in his, in my opinion, foolish “no new taxes” pledge) came out of the Omnibus Budget Reconciliation Act (OBRA) of 1990, which took affect on January 1, 1991. So what actually happened? Technically yes (see graph below), the United States went into a recession following the OBRA of 1990 going into effect. Per the official definition of a recession, that a recession is two consecutive quarters of negative GDP growth (I’m using real GDP figures), the United States experienced negative growth in the fourth quarter of 1990 and the first quarter of 1991. HOWEVER, the largest period of economic contraction actually occurred in 1990 NOT 1991. The first quarter of 1991 showed a trend of growth beginning that would continue throughout the rest of the 1990s. So using Grover Norquist’s post hoc ergo propter hoc view of the world, The OBRA of 1990 actually brought the country OUT of a recession rather than INTO a recession – of course this would be equally (well maybe not quite equally) fallacious.
Of course, while GDP contraction may create a technical recession, it is really unemployment that creates the recession mindset in a population. Again, upon first look, the data seems to say the OBRA of 1990 created higher unemployment. Average unemployment for 1990, 1991, and 1992 was 5.6%, 6.9%, and 7.5% respectively. In fact, average unemployment for the five-year period prior to the OBRA of 1990 was 5.9% versus 6.6% after its enactment; although, when this period is expanded to the decade before and after the data shows an average of 7.1% from 1981-1990 and 5.6% from 1991 through 2000. Still, both the five and ten year periods are subject to many factors and could be misleading. The more important issue in addressing the concerns of Mr. Norquist is the trend of unemployment immediately around January 1, 1991. The graph below shows that in the latter half of 1990, the unemployment rate was experiencing its most rapid growth in this period. Early-1991 still saw growth in unemployment, although this would begin to moderate through (with the exception of Dec. 1991) mid- to late-1992 when the unemployment rate began to drop. This is, of course, consistent with the expectation of a lag between economic growth recovery, which in this case began occurring in the second quarter of 1991, and improvement in the unemployment rate.
One of Norquist’s economic statements was correct; spending did grow following the OBRA of 1990 and along with it the deficit. In fact, public debt as a percent of GDP in the mid-1990s is very similar to its levels in the mid-2000s (around 67% of GDP in each case) – of course we all know that the late-1990s and late-2000s saw deficit and debt figures move in opposite directions (surpluses in the ‘90s reduced debt while growing deficits in the 2000s caused even higher debt). There is, again, more to this story however. The next graph illustrates how total spending and non-defense spending evolved for the last few decades compared to GDP. It shows relative rises with respect to GDP around the time of various recessions and also shows the spike Norquist alluded to in 1991. This is where the data does not tell the whole story and the historical narrative provides some important information. The OBRA of 1990 was not the first budget proposal by President Bush that year, it was actually the third. The first included spending cuts with no tax increases and was rejected by Democrats, the second included spending cuts with tax increases and was rejected by Republicans, and the third was accepted. Interestingly enough, the third proposal increased spending more than the second proposal, but came in the face of government shutdown, which forced enough support to get higher taxes through. The third option also shifted much of the tax increases from excise increases to income tax increases, which is also less conservative – although preferable from a growth and equity perspective.
Politically it is obvious what raising taxes did to President Bush, but it may not be as much of “the economy stupid,” as then future President Clinton suggested in his 1992 campaign, as it was “the lie stupid.” Interestingly enough, it was Richard Darman who first expressed fear that making the pledge might mean better politics and worse governance; Darman appears to have been correct. The economics suggests that the OBRA of 1990 was smart policy given the economic environment and did not have a direct negative effect on the economy as Grover Norquist suggests.
The politics of the pledge created an unnecessary dilemma between good policy and political survival. President Bush made a noble sacrifice. It is unfortunate that Grover Norquist continues to recreate this dilemma even today. The fact that one of the biggest questions surrounding the debt ceiling compromise proposals being put forth is, “does this method of raising revenue violate the pledge?” and not, “does this method of raising revenue provide the most good and least harm for our country’s economy?” is not a good sign. This leaves Republicans looking unable to govern, irresponsible, and selfish.