September 20, 2004

First Term: Bush KO's Clinton on National Debt

JK just enlightened us with a comparison of the state of the US economy during the re-election campaigns of George W Bush and Bill Clinton. While it's remarkable that W's economy bests that of 'the world's greatest politician' on so many criteria, one statistic stands out like a big fat dirty hippie's sore thumb:

Debt as percentage of economy: Bush (37.5%), Clinton (48.5%)

"What about the vaunted "Clinton Surplus," I asked. JK surmised it represented a compilation of public plus private debt, thereby masking higher public debt now with a private debt rate lower now than during Clinton's campaign. I just had to know more, so I searched references and shelled out $2.95 to download a Washington Times archive: 'Tallying presidential economic success' by Richard Rahn of the Cato Institute, published June 18,2004. The salient paragraph reads:

Opponents of Mr. Reagan charge his deficits "left future generations saddled with debt." Mr. Reagan did use debt to partially fund his increase in military spending to win the Cold War, just as Franklin Roosevelt used debt to win World War II. At the end of the Roosevelt administration, the national debt held by the public was more than 100 percent of our gross domestic product (GDP). At the end of the Reagan administration, it was only 41 percent of GDP. (Mr. Kennedy left us with debt equal to 42 percent of GDP; in 1996 at the end of the first Clinton administration, debt was 48 percent of GDP; and it is about 37 percent today.)

** Calling all fact-checkers!! **

It's now clear that we're talking exclusively about public debt (federal government). Clintonites will be quick to retort that the deficit went to zero and, in fact, was projected to have surpluses before he left office. But this was in his second term, and didn't factor into any campaign for his re-election. Apparently the 'modern depression' we endured in Clinton's first term did not hurt him with voters. We'll see where W takes his place in history at the end of his second term. Rahn concludes:

"The jury is still out on the current President Bush, but his tax cuts are working in the same magical way they did for Presidents Kennedy and Reagan. If the Fed can keep inflation low, and if the administration can reduce the growth in spending and regulation, Mr. Bush still has the opportunity to a place in the top three - if he is re-elected."

The entire article archive is available below. (Note that it is copyrighted material, so you may read it or link to this post but you can't reprint it yourself, or something like that.) It really puts the screws to the modern myth that Clinton was the best "economy president" in history.

Washington Times

Washington Times, The (DC)


June 18, 2004
Tallying presidential economic success

Author: Richard W. Rahn, SPECIAL TO THE WASHINGTON TIMES

Section: COMMENTARY

Page: A19


Article Text:


In the last half-century, under which president did the economy perform the best? Most Americans would answer Ronald Reagan, while some Democratic commentators have argued it was Bill Clinton or John F. Kennedy. What is the truth?


A president has a major influence on tax, spending, regulatory and trade policies that largely determine the rate of economic growth, but he is constrained by Congress, particularly when one or both houses are controlled by the opposition party. A president has much less influence on inflation and interest rates in that they are largely determined by the independent Federal Reserve.


However, a president can influence the Fed through his selection of the chairman and members of the board, as well as through "moral suasion."


Increasing the rate of economic growth, creating jobs, reducing inflation and interest rates - up to a point, and reducing the tax burden are normally considered hallmarks of a presidential success. A president who needs to correct the failed economic policies of a predecessor will have more difficulty obtaining very low unemployment, so the degree of improvement over the previous administration is an important measure of success, rather than the average or ending number.


A well-known Democrat economist, the late Arthur Okun, created the misery index (i.e., the rate of inflation plus the unemployment rate), which was a proxy to tell the public whether they were better off under the current or under the previous administration. Using the misery index criteria, three Presidents - Messrs. Kennedy, Reagan and Clinton - improved on their predecessor's performance by the end of their own term. The economic misery index dropped the most on Mr. Reagan's watch to only 10.1 from Mr. Carter's horrific 17.9.


Using the "misery index" improvement criteria, Mr. Reagan was clearly No. 1, followed by Mr. Clinton and Mr. Kennedy. Mr. Carter by far performed worse than any of the last nine presidents.


The rate of economic growth is often considered a measure of a president's success. However, this measure must be used with care, given it normally takes at least a year after a new president takes office before he can get his initial tax and spending program enacted by Congress. Thus, it is appropriate to lag this measure by one year so a new president is not saddled with the sins or virtues of his predecessor.


John Kennedy is the clear winner in the growth criteria. He had the advantage of taking office during the middle of an economic recovery, and the wisdom to enact major tax cuts, both of which resulted in very high growth rates during and immediately after his administration.


Ronald Reagan comes in next in the growth race, even though the economy suffered from stagnation and double-digit inflation and interest rates when he took office. Also, his major tax cuts were not fully effective until two years into his administration. Mr. Clinton comes in third, having inherited a growing economy, but his policies left the nation in a recession.


Mr. Reagan and Mr. Clinton come in No. 1 and No. 1, respectively, in the jobs' creation race. About 17 million jobs were created during each of their times in office, but Mr. Reagan did it with a labor force about 18 percent smaller than the one when Mr. Clinton took office. In addition, employment lags economic growth, so when an appropriate one-year lag is used to adjust the figures, Mr. Reagan also obtains a substantial absolute advantage in numbers of new jobs created.


Both Mr. Kennedy and Mr. Reagan cut taxes for all income levels. Mr. Kennedy reduced the maximum rate from 91 percent to 70 percent, and Mr. Reagan from 70 percent to 28 percent. In both cases, the economy boomed and federal government tax revenues actually increased. Under Mr. Reagan, federal tax revenues rose from $599 billion in 1981 to $991 billion in 1989. despite the tax rate cuts.


Opponents of Mr. Reagan charge his deficits "left future generations saddled with debt." Mr. Reagan did use debt to partially fund his increase in military spending to win the Cold War, just as Franklin Roosevelt used debt to win World War II. At the end of the Roosevelt administration, the national debt held by the public was more than 100 percent of our gross domestic product (GDP). At the end of the Reagan administration, it was only 41 percent of GDP. (Mr. Kennedy left us with debt equal to 42 percent of GDP; in 1996 at the end of the first Clinton administration, debt was 48 percent of GDP; and it is about 37 percent today.)


As a rough rule of thumb, if the economy grows 6 percent (4 percent real and 2 percent inflation), a deficit of 2 percent to 3 percent yearly can be sustained forever without increasing the national debt burden. (If your personal income grows faster than the amount it costs you to service your debts, you can keep acquiring debt and yet the burden will grow lighter rather than heavier.) During the last three years of both the Reagan and the Kennedy administrations, GDP was growing faster than the debt burden.


By any reasonable criteria, Presidents Reagan and Kennedy were far and away the most economically successful presidents in the past half-century. They both left the economy stronger and freer than they found it. And most Americans, regardless of income level, were clearly better off. Mr. Reagan faced a far tougher challenge than did Mr. Kennedy, whose term was also too short to be definitive.


The jury is still out on the current President Bush, but his tax cuts are working in the same magical way they did for Presidents Kennedy and Reagan. If the Fed can keep inflation low, and if the administration can reduce the growth in spending and regulation, Mr. Bush still has the opportunity to a place in the top three - if he is re-elected.


Richard W. Rahn is a senior fellow of the Discovery Institute and an adjunct scholar of the Cato Institute.

Copyright 2004 News World Communications, Inc.

Posted by JohnGalt at September 20, 2004 12:29 PM
Comments

Interesting. I wondered about JK's thought on private de bt, everything I have read indicates that this de bt has been steadily climbing for decades. What Clinton did was reduce/eliminate the deficit, which of course is very different than the de bt. As to "good ecomony Presidents" I believe there really is no such thing. There are good presidents and good economic periods and any relation of one to the other is tenuous at best.

Posted by: Silence Dogood at September 20, 2004 01:13 PM

Very interesting. I fear that the first differential of de bt / GDP would have been better in 1996. While you have your credit card out, you want to look that up?

Posted by: jk at September 20, 2004 02:29 PM

Silence: while there is a latency of leadership in the executive to economic performance and this latency is hard to categorize, surely you don't deny a correlation. The economy would have been the same had Goldwater won in 1964, or had Carter been reinaugurated in 1981?

Posted by: jk at September 20, 2004 02:32 PM

?? The stats I already paid for are for de_bt/GDP...1996, 2003, 1988 and 1945. Did you mean deficit/GDP? De_bt is roughly the integral of deficit over time. In some ways they may be "very different" things, but they should both ideally be zero (combined with the lowest possible tax rate.)

My $2.95 article claims that "Increasing the rate of economic growth, creating jobs, reducing inflation and interest rates - up to a point, and reducing the tax burden are normally considered hallmarks of a presidential success." Obviously some people think that who we choose to be president determines more than just which countries we bomb.

Posted by: johngalt at September 20, 2004 02:50 PM

OK, JK (at the risk of debating economics with you - I always feel a bit out gunned) I see one direct relationship between the President and the economy - federal spending. FDR used it, Johnson used it, and Reagan used it. For all the talk about Reagan's tax cuts I never hear much about his defense spending and how that spurred the economy. Carter suffered throught 2 large economic factors he could not control, oil prices and the failure of Detroit to recognize the market shift toward smaller autos. Bush Sr. had the reduction in defense spending and Bush Jr. had the collapse of the dot com boom and the accounting scandals. Other than directly buying their way out with federal spending I don't think our chief executive wields that much power over the economy. Tax cuts I guess would be the delayed reaction you speak of, but I wonder how directly their effects can be charted with the complexity of the economy and especially the tax code plus the "law of unintended results".

Posted by: Silence Dogood at September 22, 2004 02:20 PM

Federal Spending is a Keynesian incentive. Lord Keynes developed "Macroeconomics" which aggregated demand and supply. Therefore, government spending was considered the equal of private spending. There is no question that it works -- but my boys feel that the effect is temporary and less effective than a supply-side incentive like cutting marginal tax rates.

Basically, I think we agree that the blame/credit given to the executive every four years is overstated. Yet I will not join you that he has no control. Trade, tax, and monetary policy all have substantive effects on the economy.

Carter inherited Nixon's meddling: He pulled us out of Breton Woods, instituted wage and price controls and said "We're all Keynesians now." Carter contributed positively with deregulation in the transportation sector but offered no leadership for stagflation.

Reagan let Volker get tough with monetary policy to nip inflation and then fed the fiscal side with sweeping marginal rate cuts.

Supply-siders BEG people to look at historical data because tax cuts have always lead decade-long periods of economic expansion. It worked for Kennedy, it worked for Reagan, and I think when the latency rectifies itself, the figures will be very kind to President Bush.

As you've heard me yell, the same historical look shows Reubenomics to be an outlier. Clinton rejuvenated the Reagan boom with NAFTA, GATT, and China MFN and WTO. Frightening to me that Senator Kerry wants the tax hikes, which will squish this inchoate recovery -- and protectionism. He has chosen the worst parts of Democrat Economics.

Posted by: jk at September 22, 2004 03:30 PM
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