Lately, the Republican fable has carried the day. What’s stunting incomes and economic growth, it says, is big government, deficits and excessive taxation. Get rid of those things and the economy will fly. The Democrats’ fable is mushier. To grow faster, it says, we have to invest in education and high-value industries, so we can compete in the world.
Both of these views sound true enough to be plausible, but there’s no proof that either approach will get wages up. You’ll need to move past ideology to make good economic choices for yourself. Here are some counter-facts to the fables you’re going to hear:
Honey, we shrunk the government (at least some of it). Since 1970, defense spending has dropped by half, when figured as a percentage of gross domestic product (GDP tots up national output). Spending caps, enacted in 1990 and 1993, have squelched the growth of discretionary programs. The federal payroll peaked in 1990, then tumbled by 8.5 percent–with civilian defense workers accounting for most of the cuts.
Offsetting these savings, payments to individuals have been shooting up. That’s the real big government. Transfers of cash account for two thirds of federal outlays: money collected from working people and paid, in the main, to bondholders, Medicare patients and social-security beneficiaries (Aid to Families With Dependent Children came to just 1.1 percent of outlays). The size of government has held to a steady 21 to 23 percent of GDP. But absent cutbacks in popular programs, that share will balloon–robbing the private economy of resources that it needs to grow.
Nothing stops the expansion of state and local governments. Payrolls are up 8 percent since 1990 and 23 percent since 1980. They’ll mushroom if federal welfare programs go to the states.
Here’s a surprise: the federal budget would be in surplus if it weren’t for that pesky debt. Last year the government had to pay bondholders $232 billion in interest. Absent that, tax collections would have more than covered all of the government’s programs. This kind of surplus–call it an “operating surplus”–has occurred only five other times since 1970. Each time, the country was in a recession or near one (for investors, that’s a cautionary note).
Overall, the deficit shrank last year to 2.3 percent of GDP, down from a Reagan-era peak of 6.3 percent. You have to go back to 1979 to find another deficit that low.
Ironically, the deficit hawks picked up some ground when the president and Congress blew the budget deal. That scotched an early tax cut (a money loser for the Feds) and left many programs funded at especially low levels. The political standoff has turned fiscal policy tighter, says Tim Taylor, editor of the Journal of Economic Perspectives in Minneapolis.
When government bashers yell about “bigness,” they may mean intrusiveness rather than size. The public has wanted, and Congress passed, a slew of laws improving our quality of life: clean air and water, food labeling, workplace safety. Some of the enabling regs, however, are stupid, rigid and expensive. So you have to decide what you intend when you cheer a pol who wants the government off our backs. Fewer health-and-safety laws? Or just regulatory common sense?
Reported inflation is running at 2.7 percent. Normal fluctuations aside, it’s almost certain that low inflation and interest rates are here to stay. This generation of policymakers was shaped by the havoc that double-digit inflation spread. If policy errors are made today, they’ll probably be on the slow-growth, disinflation side.
Most Americans are paying less federal income tax, even though they hate to admit it. The median, two-paycheck family last year ($52,000 in income) paid Uncle Sam 9.5 percent, down from 11.5 percent in 1985, says economist Arthur Hall of the Tax Foundation. They paid more, however, in payroll tax: 7.3 percent of income, compared with 6.8 percent 10 years ago (and double that if you count the employer’s contribution). State and local taxes ding you, too–now at 12.5 percent of median income, up from 11.9 percent in 1985.
If tax cuts could buzz your wages back to higher growth, Ronald Reagan would have done it. But there was no Reagan miracle, says Herbert Stein, senior fellow of the American Enterprise Institute. Total output in the 1980s ran a tad above that of the 1970s but well below the fat 1950s and 1960s, when marginal tax rates were much higher. Compared with other countries, America is lightly taxed. All levels of government collected 31.5 percent of GDP in 1994, compared with 32.3 percent in Japan and 46.5 percent in Germany.
America is pumping out jobs at a rapid rate. There’s justified angst over layoffs, wage cuts and low income growth. Nevertheless, unemployment has dropped to a meager 5.5 percent–a level reached only in four years out of the past 25. A recent Harris poll ranked the deficit as the nation’s top problem. Jobs came in 10th.
Trade doesn’t cost jobs, nor add jobs either, says Barry Bosworth of the Brookings Institution. It shifts them from lower-wage sectors to higher-wage ones, which is good in the long run. We’re importing more T shirts and exporting more designer clothes.
Most of the workers displaced today are losing out not to cheap foreign labor but to down-home mergers, changing technologies and tough competition from other U.S. firms. The pace of technological change will boost growth eventually, says Stanford economist Michael Boskin. There’s no proof, however, that presidents can effect a quick fix by aiding high-wage industries (a donkey fable) or by scattering tax cuts (tales from the elephant mind). National savings have to rise, which deficit reduction helps. Otherwise, the parties differ mainly in their support for the safety net while the economy regroups.
