Remove Impeachment?

February 9, 2020

By Steve Stofka

Despite a strong labor market and a rising stock market, last year’s deficit was the largest in seven years (Tankersly, 2020). The tax cut package of 2017 has not delivered the promised economic growth. The first estimate of 2019 GDP annual growth was 2.3% (FRED, n.d.), the average during the past four years of the Obama administration. According to Mr. Trump, that growth rate was a “disaster” under Obama. Now it is a good growth rate. In his State of the Union address this week, President Trump said that “our economy is the best it has ever been” (CPR, 2020).

Growth during the three years of the Trump administration has averaged 2.5%, slightly above the tepid rate of growth under Obama. The growth standard is 3.0%, the average during the last fifty years of the 20th century.

How to make a tired nag of an economy look like a racehorse? The White House Council of Economic Advisors compared GDP growth during the Trump administration to growth projections of 2.0% made before the 2016 election (CEA, 2020). That comparison makes the growth rate look ½% higher than expectations. A component of GDP growth is government spending, whether that spending is borrowed or not. That additional growth has come at the expense of the Federal debt (CBO, 2020).

Like the Obama administration before, the Trump administration has bought itself GDP growth by borrowing money from the rest of the world and spending it. Without those annual deficits, GDP growth would have been negative for the past 15 years. The stock market has climbed 33% since the 2016 election because the money is flowing freely from Washington and the Federal Reserve. The amount of borrowed and printed money that the Federal government pumps into the economy creates additional profits for companies.

As predicted, President Trump was found not guilty by the Senate. Since the founding of the country, three Presidents have been tried for impeachment but not convicted. Let’s look at the Presidents who were not impeached even though they committed arguably impeachable offenses.

 President Franklin Delano Roosevelt was not impeached by a Democratic House for lying to Congress about the lend lease program to Britain in 1940. President Lyndon Johnson was not impeached by a Democratic House for lying to Congress about the Gulf of Tonkin attack in Vietnam in 1964 (Moise, 2019). President Ronald Reagan was not impeached by a Democratic House for his complicity in selling arms to Iran (Brown U., n.d.).

All of these were matters were of grave national importance to the American people. President Clinton was impeached by a Republican House for lying to them about his affair with a White House aide. Tawdry, yes. National importance? No.

Since no president has been convicted of impeachment, should we enact a Constitutional amendment to nullify impeachment? The arguments we have today about impeachment reflect the same arguments made by delegates at the Constitutional Convention in 1787 (Klarman, 2016). Some thought that state legislatures should initiate impeachment proceedings. The “New Jersey” plan proposed that a majority of state governors could remove a president. Some wanted to give the Congress power to remove a president at will, but others thought that would make the president subservient to Congress. Thinking that Congress might threaten impeachment as retribution for a presidential veto, some advocated against impeachment at all. Shouldn’t the voters decide, they argued? If the president were elected every two years, the voters could vote a president out of office at the next election. A Presidential term should last longer than two years was the counterargument. Most of the delegates agreed that impeachment was a check on a president and decided to include it in the Constitution.

What offenses should be subject to impeachment? The delegates disagreed on that as well. Some thought it should be for “malpractice or neglect of duty” but others thought the offenses needed to be more serious. “Treason, bribery, and corruption” was suggested, but “corruption” was not specific enough. “Maladministration” was proposed but was rejected. How about “other high crimes and misdemeanors against the State?” Well, that was more specific than “corruption” and “maladministration,” but not too specific as to straitjacket Congress. The final language inserted in the Constitution was “Treason, Bribery, or other high Crimes and Misdemeanors” (Article II, Section 4). Today, we argue about that wording. Go figure.

When the Constitution was written, the delegates did not contemplate a political system with two parties. Within two decades, they realized their mistake and initiated the 12th Amendment to have the president and vice-president elected together from the same party.

Some Constitutional delegates worried that the impeachment process would become politicized. History has shown that they were right. Should we admit that a conviction of impeachment is practically impossible? We must either lower the threshold for conviction in the Senate from a super-majority of 67 Senators to a majority vote, or remove the idea of impeachment from the Constitution entirely. What do you think?



Brown U. Research. (n.d.) Understanding the Iran-Contra Affairs: The Beginning of the Affair. [Web page]. Retrieved from

Colorado Public Radio (CPR). Transcript & Video: President Donald Trump’s 2020 State Of The Union. [Web page]. Retrieved from

Congressional Budget Office (CBO). (2020, January). Budget and Economic Data. Retrieved from Note: 2019’s Federal deficit was 4.7% of GDP, 40% higher than the 3.3% deficit in 2016, the last year of the Obama administration.

Council of Economic Advisors (CEA). (2020, January 30). United States GDP Growth Continues Exceeding Expectations. Retrieved from

Federal Reserve (FRED). (2020, January 30).  Real Gross Domestic Product (GDPC1). [Web page]. Retrieved from

Klarman, M. J. (2016). The framers coup: the making of the United States Constitution. New York, NY: Oxford University Press. (pp 235-237).

Moïse Edwin E. (2019). Tonkin Gulf and the escalation of the Vietnam War. Annapolis, MD: Naval Institute Press, (Preface). Sample retrieved from

Photo by Darren Halstead on Unsplash

Tankersley, J. (2020, January 13). Budget Deficit Topped $1 Trillion in 2019. NY Times. [Web page]. Retrieved from


April 14, 2019

by Steve Stofka

In the current housing market, there are .4 new homes started for every 100 people, near century long lows. The Millennials (1981-1996) are now the largest generation in history but home builders are not responding to the population boom (Note #1). In the 1970s, home builders started triple that number of homes in response to the swelling number of Boomers coming of age.

Have you heard that there won’t be enough workers to support Social Security and Medicare payments for the retiring Boomer generation? Here’s the ratio of seniors to the core work force aged 25-54. Yes, it has gone up since the Financial Crisis.

Here’s the ratio of seniors to all workers. Each worker’s social security taxes are “funding” benefits for three seniors. The Social Security fund was never a separate fund, only an accounting gimmick that politicians enacted eighty years ago. As former Fed chairman Alan Greenspan explained, the federal government can continue to make payments to seniors (Note #2).

Have you heard that the interest on the debt is going to grow so large that it will crowd out all other spending? As a percentage of total expenses, it is at a low level.  Each year the federal government runs a deficit of about 2.4% (Note #3). Can it continue to do that indefinitely? Yes.

Each day we hear a lot of half-truths and outright lies. As the 2020 Presidential election gets nearer, half-baked versions of reality will grow like mold on bread. The Constitution was structured to encourage debate as an alternative to war among ourselves. The 1st Amendment guarantees everyone a right to spout half-truths and lies. Two dominant political parties compete for our belief in their version of the truth. This is the land of argument.


  1. Pew Research has redefined the Millennial generation as those born 1981-1996.
  2. YouTube video of Alan Greenspan explaining to Representative Paul Ryan that the Federal Gov’s checks are good
  3. The 80-year average of deficits is 2.4%. Not including debt for wars, it is 2.2%, per Steve Keen, author of Debunking Economics.

The Nature of Money

March 31, 2019

by Steve Stofka

Modern Monetary Theory (MMT) helps us understand the funding flows between a sovereign government and a nation’s economy. I’ve included some resources in the notes below (Note #1). This analysis focuses on the private sector to help readers put the federal debt in perspective. In short, some annual deficits are to be expected as the cost of running a nation.

What is money? It is a collection of  government IOUs that represent the exchange of real assets, either now or in the past. Wealth is either real assets or the accumulation of IOUs, i.e. the past exchanges of real assets. When a sovereign government – I’ll call it SovGov, the ‘o’ pronounced like the ‘o’ in love – borrows from the private sector, it entices the holders of IOUs to give up their wealth in exchange for an annuity, i.e. a portion of their wealth returned to them with a small amount of interest. A loan is the temporal transfer of real assets from the past to the present and future. This is one way that SovGovs reabsorb IOUs out of the private economy. In effect, they distribute the historical exchange of real assets into the present.

What is a government purchase? When a SovGov buys a widget from the ABC company, it also borrows wealth, a real asset that was produced in the past, even if that good was produced only yesterday. The SovGov never pays back the loan. It issues money, an IOU, to the ABC company who then uses that IOU to pay employees and buy other goods. A SovGov pays back its IOUs with more IOUs. That is an important point. In capitalist economies, a SovGov exchanges real goods for an IOU only when the government acts like a private party, i.e. an entrance fee to a national park. Real goods are produced by the private economy and loaned to the SovGov.

What is inflation? When an economy does not produce enough real goods to match the money it loans to the SovGov, inflation results. Imagine an economy that builds ten chairs, a representation of real goods. If a SovGov pays for ten people to sit in those ten chairs, the economy stays in equilibrium. When a SovGov pays for eleven people to sit in those ten chairs, and the economy does not have enough unemployed carpenters or wood to build an eleventh chair, then a game of musical chairs begins. In the competition for chairs, the IOUs that the private economy holds lose value. Inflation is a game of musical chairs, i.e. too much money competing for too few real resources.

A key component of MMT framework is a Job Guarantee program, ensuring that there are not eleven people competing for ten jobs (Note #2). Labor is a real resource. When the private economy cannot provide full employment, the SovGov offers a job to anyone wanting one. By fully utilizing labor capacity, the SovGov keeps inflation in check. The  idea that the government should fill any employment slack was developed and promoted by economist John Maynard Keynes in his 1936 book The General Theory of Employment, Money and Interest.

The first way a SovGov vacuums up past IOUs is by borrowing, i.e. issuing new IOUs. I discussed this earlier. A SovGov also reduces the number of IOUs outstanding through taxation, by which the private sector returns most of those IOUs to the SovGov.

Let’s compare these two methods of reducing IOUs. In Chapter 3 of The Wealth of Nations, Adam Smith wrote that government borrowing “destroys more old capital … and hinders less the accumulation or acquisition of new capital” (Note #3). Borrowing draws from the pool of past IOUs; taxation draws more from the current year’s stock of IOUs. Further, Smith noted that there is a social welfare component to government borrowing. By drawing from stocks of old capital it allows current producers to repair the inequalities and waste that allowed those holders of old capital to accumulate wealth. He wrote, “Under the system of funding [government borrowing], the frugality and industry of private people can more easily repair the breaches which the waste and extravagance of government may occasionally make in the general capital of the society.”

Borrowing draws IOUs from past production, while taxation vacuums up IOUs from current production. Since World War 2, the private sector has returned almost $96 in taxes for every $100 of federal IOUs. Since January 1947, the private sector has loaned the federal government $371 trillion dollars of real goods, the total of federal expenditures (Note #4). What does the federal government still owe out of that $371 trillion? $15.5 trillion, or 4.17% (Note #5). If the private sector were indeed a commercial bank, it would expect operating expenses of 3%, or $11.1 trillion (Note #6). What real assets does the private sector have for the difference of $4.4 trillion in the past 70 years? A national highway system and the best equipped military in the world are just two prominent assets.

The federal government spends about 17-20% of GDP, far lower than the average of OECD countries (Note #7). That is important because the accumulated Federal debt of $15.5 trillion is only .9% of the $1.7 quadrillion of GDP produced by the private sector since January 1947. Our grandchildren have not inherited a crushing debt, as some have called it. In the next forty years, the U.S. economy will produce about $2 quadrillion of GDP (Note #8). If tomorrow’s generations are as frugal as past generations, they will generate another $18 trillion of debt.

Adam Smith called a nation’s debt “unemployed capital,” a more apt term. The obligation of a productive nation is to put unemployed capital to work for the community. Under the current international system of national accounting, there is no way to account for the accumulated net value of real assets, or the communal operating expenses of the private economy. Without a proper accounting of those items, we engage in noisy arguments about the size of the debt.

In next week’s blog, I’ll examine the inflation pressures of government debt. I’ll review the Federal Reserve’s QE programs and why it has struggled to hit its target inflation rate of 2%. We’ll revisit a proposal by John Maynard Keynes that was discarded by later economists.


1. A video presentation of SovGov funding by Stephanie Kelton . For more in depth reading,  I suggest Modern Monetary Theory by L. Randall Wray, and Macroeconomics by William Mitchell, L. Randall Wray and Martin Watts.

2. L. Randall Wray wrote a short 7 page paper on the Job Guarantee program . A more comprehensive 56-page proposal can be found here 

3. Adam Smith’s The Wealth of Nations was published in 1776, the year that the U.S. declared independence from Britain. Smith invented the field of economics. The book runs 900 pages and is available on Kindle for $.99

4. Federal Expenditures FGEXPND series at FRED.

5. At the end of 1946, the Gross Federal Debt held by the public was $242 billion (FYGFDPUB series at FRED). Today, that debt total is $15,750 billion, or almost $16 trillion dollars. The difference is $15.5 trillion. The debt held by the public does not include debt that the Federal government owes itself for the Social Security and Medicare “funds.” Under these PayGo pension systems, those funds are nothing more than internal accounting entries.

6. In 2017, the Federal Reserve estimated interest and non-interest expenses for all commercial banks at 3% (Table 2, Column 3).

7. Germany’s government, the leading country in the European Union, spends 44% of its GDP Source

8. Assuming GDP growth averages 2.5% during the next forty years.

9. International Accounting Standards Board (IASB) sets standards for public sector accounting.


Washington’s Role

“The rich are much better placed to feed at the public trough. The poor get crumbs.” – Steve Hanke, American Economist, 1942 –

August 5, 2018

by Steve Stofka

In the past fifty years, the increasing role of the Federal government in the economy has been the chief contributor to inequality. In the last years of the Bush administration, America became a socialist economy. Credit growth under the Trump administration has not changed from the levels during the Obama administration. On this score, Trump is Obama II.

Since the Great Recession, the federal government has far surpassed the role of banks in net input into the economic engine. In the post WW2 period, the annual growth in credit outstanding (see Notes #1) to households, corporations, state and local government surpassed the net input of the federal government, its spending less the taxes it drained out of the engine. The blue line in the graph below is the growth in bank credit.


The Great Society and the escalation of the Vietnam War in the 1960s marked a changing role for the Federal government. Bernie Sanders marked the early 1970s as the beginning of the increase in inequality. Bernie suggested that the Federal government should have a greater role in the economy to correct the problem. Bernie has it backwards, as I will show. It is the greater role of the Federal government in the economy that has contributed to inequality. The hand that feeds the poor becomes the hand that feeds the rich.

Under subsequent presidents after 1968, both Republican and Democratic, the Federal input into the economy dominated the net – loans minus payments – input of bank credit. When the Federal government spends more than it taxes, it becomes a proxy debtor for individuals, state and local governments who cannot borrow enough to meet their needs. As the net credit input into the economy sank in the last two years of the Bush administration, 2007-2008, the role of the Federal government approached the levels of western European socialist governments.


The Obama Administration and super-majority Democratic Congress of 2009-2010 simply held that input level established earlier by the Bush Administration and a Democratic House. When Republicans took control of the House in 2011, they fought with the Obama Administration to reduce the input level. From 2012 through 2015, the growth in credit eclipsed the net input of the Federal government. Since early 2016, the growth in Federal input has once again dominated the role of the banks in the private economy. After the tax cuts passed last year, the Federal government will drain less taxes out of the economy and further cement its dominant role as an input into the engine.

For the past 65 years, quarterly credit growth has averaged 1.9%. In the last ten years, it has averaged .4%. From April 2017, two months after Trump took office, through March 2018, quarterly net credit growth averaged the same .4% as it did during the Obama years. Banks may express confidence in the Trump presidency, but their credit policies indicate that they have as little confidence in Trump’s Washington as they had in Obama’s Washington. Unless Trump can turn that sentiment, his administration will suffer the same lackluster growth as the Obama administration. If the Federal government continues to dominate economic input, Trump’s pledge to drain the swamp will be broken. Federal economic power only feeds the K-Street crocodiles lurking in the swamp waters.



  1. The growth of credit outstanding (net input) is a function of new credit issued (input), debtors’ payments on existing loans (drain) and the write-off of non-performing loans (drain).

K-Street in Washington is the location of many of the nation’s most powerful lobbying firms.


Four Foundations

Over the next two months, there will be much debate over spending cuts as the debt limit ceiling approaches in late February.  For the past four years, the Federal Government has been running $1 trillion annual deficits.

Deficits are the annual shortfall; debt is the cumulative amount of those annual deficits.  The total debt of the Federal Government, including money owed to the Social Security trust funds, is over $16 trillion, and is now more than the annual GDP, the sum of all economic activity in the country.

Republicans contend that the real problem with the budget is entitlement spending: Medicare, Social Security and Medicaid are the largest programs.  In the past ten years, spending on these three programs has almost doubled and now consumes 47% of the total Federal spending budget.

Spending increases on these programs will escalate now that the first wave of the Boomer generation has reached retirement age.  Too many rigid ideologues in the Democratic Party defiantly defend every penny of this spending.

On the other hand, defense spending is near WW2 levels.  On an annual basis, the current $700 billion we spend on defense is far less than the inflation adjusted levels of $1 trillion we spent at the height of WW2.

Wars may be won or lost at their peaks but the spending occurs over several years.  When we look at a moving five year average of defense spending, we are near the average of WW2.

Judging by the amount of money we are spending, we are fighting the third World War.  Yes, it’s a dangerous world but is it as dangerous as the state of the world during WW2?  Has Al-Qaeda, a loose coalition of stateless forces, subjugated Europe as Hitler’s armies did?  Is the threat of Iran comparable to the domination of Japan over the eastern seaboard of Asia during WW2? 

In the late 50s, President and former General Eisenhower warned that the military industrial complex would invade the halls of Washington.  Preparedness is prudence, but Eisenhower knew firsthand that the industry peddles a self-serving culture of fear to those in Washington.  As high military spending becomes entrenched in the federal budget, regions of the country become dependent on the defense industry; those people send  politiicans to Washington to vote for more military spending and the spending cycle spirals upwards.

Each year, we are spending about $250 billion more than the 70 year average of military spending.  Unlike the spike of WW2 spending, the recent five year average has surged upwards like a wave – a wave that is drowning this country in debt.  As troubling as this is, we must remember that we are running $1 trillion deficits – four times the excess amount of military spending.  Those who say that we can balance the budget by cutting defense spending simply have not looked closely at the data.  We can not balance the budget by cutting only entitlement spending or only defense spending.  Even when we combine the two, we still can not balance the budget.

Which brings us to receipts, a gentle euphemism for taxes.  Economic bubbles inflate the amount of tax revenue to the government but the resulting lack of revenues after the bubble bursts outweighs the increased revenue while the bubble was building.

When we run a projection of revenues using more sustainable averages based on longer term trends, we come up with an optimized $3 trillion in revenues for the current year, still leaving us $600 billion short of current spending. 

The solution then is a mix of four factors: more revenue from 1) economic growth and 2) tax reform; less spending for both 3) defense and the 4) social safety net.  These are not easy choices, particularly when partisans vigorously defend a particular program as though it were the last stand at the Alamo.

Cliff Diving

November 18th, 2012

This past week, President Obama gave a post-election news conference, answering a number of questions about the fiscal cliff due to take effect on January 1st if the lame duck Congress and the President can not come to an agreeement on some budget bandaging.  The stock market has had the jitters since the first week of October, falling 9% since then; about half of that decline came after the election.  At almost the same hour that it became apparent that the balance of power in Washington would remain the same came the unwelcome forecast of no growth for the Eurozone in 2013.  When in doubt, get out.

For the past two years, there have been few “Kumbaya” moments in the halls of Congress or the White House.  The market has had a good run this year; capital gains taxes could increase next year; many decided to take their profits and run.  A I wrote a month ago, the drop in new orders for durable goods was troublesome.  Three weeks ago, the newest durable goods report showed further declines yet consumer confidence was up, creating a tug of war and I waved the yellow flag, saying that the “prudent investor might exercise some caution.”

For the long term investor who makes annual investments in their IRA, this drop in the stock market is an opportunity to make some of that contribution for this year.  If the wrangling over revenue and spending cuts continues over the next few weeks, the market could drop another 10 – 15%. When budget negotiations collapsed in July – August 2011, the market declined almost to bear market territory – about 19%.  All too often, some of us wait till the last minute in April to make our annual IRA contribution. 

The “cliff” terminology was spoken by Fed Chairman Ben Bernanke at a hearing in February.  He probably wished he had chosen less colorful language but he was probably trying to wake up some of the senators at the hearing.  How bad is this cliff?

The total measured economic output of the U.S., its GDP, is estimated by the BEA (Bureau of Economic Analysis) at around $16 trillion – $15.85 trillion, to be exact, based on this year’s estimated growth of about 2.2% and next year’s average 2.75% estimate of growth.  What’s a trillion dollars?  About $9000 for every household in the country.

The non-partisan Congressional Budget Office (CBO) estimated some of the economic impacts if we did go over the cliff; in other words, if the spending cuts and revenue increases occurred next year.  Below is a chart of the percentages of GDP that each component of spending cuts and revenue were to occur.

The total of these is 3.2% of the economy.  Well, that’s not Armageddon, you might think and you would be right. As I mentioned earlier, forecast growth is only about 2.75% for next year so that means that GDP would contract slightly next year.  On the other hand, the cliff sure helps the deficit for next year, cutting it by almost half.  The deficit is projected at about $1.1 trillion before spending cuts and revenue increases.  In more manageable numbers, the country is going to go further into debt next year to the tune of almost $10,000 for every household.

Politicians in front of a microphone are prone to hyperbole.  So are news anchors.  Politicians try to sell their version of the story; news anchors try to keep our attention.  Small numbers like 3.2% of GDP might not get our attention so we could hear more dramatic numbers.  News anchors may say “Spending cuts of $100 billion” because $100 billion sounds important.  But without a total or a percentage, we have no context to evaluate the amount of money.  Is $100 billion a little or a lot?  $100 billion in spending cuts is .6% of the entire economy, or 2.6% of the budget for this coming year.  We may hear “Revenue increases of $400 billion,” which sounds gigantic.  It is 2.5% of the economy, or an additional 13.8% of the projected federal revenue.  Remember, even with the revenue increases, should they take effect, the country’s budget will still be “in the red” an estimated $600 billion dollars, or $5400 per household.

This country needs more revenue and it needs to cut expenses.  Each side of the aisle will fight to protect the “job creators” (interpretation: people with money) or the “working poor” (interpretation: people who are barely making it week to week) or the “middle class” (interpretation: the rest of us).  Tax the other guy, not me.  Cut the other guy’s deductions, not mine.  Cut subsidies, but not mine.  Cut expenses but not in my industry or area of the country. This is the same kind of behavior that 5 – 8 year old kids exhibited in an experiment featured on CBS’ 60 Minutes tonight.  Maybe, just maybe, we need to grow up.

Spending and Revenue

This Labor Day weekend is the eye in the storm of the Republican and Democratic conventions.  As we listen to all the rhetoric and half-truths (at best) coming out of both conventions, it might be best to take a long term view of government spending.  The two biggest components of federal spending are defense and what is called human resource spending, which includes federal Education and Training Programs, Medicare, Medicaid, Social Security, various social safety net programs and veterans’s benefits (functions 500 – 700 described here ).  Data is from the Office of Management and Budget (Source), Table 3.1, Outlays by Function and Super-function.

The 70 year average (1940 – 2011) of total government spending is 20.6% of GDP.  The 30 year average from 1981 to 2011 is 21.2%.  During the Obama administration, spending has increased to 24.1% of GDP.  Each 1% of GDP is about $150 billion at current levels of GDP. (Click to enlarge in separate tab)

Defense spending has doubled in the past decade.

This spending figure includes only active defense spending.  Outlays for Veterans benefits, education and job training for vets are included under the Human Resources superfunction.  Housing benefits for veterans are included under another superfunction, Physical Resources.  The total outlay is estimated at over a trillion dollars and that figure has been acknowledged by Senator John McCain, a long time supporter of strong defense spending.

As a percent of GDP, however, active defense spending has remained below 5%. Putting this increase in spending in historical perspective puts the lie to the contention by some liberals that our budget problems are mostly due to defense spending.

Human Resource spending includes Social Security payments, which comes out of current taxes and a trust fund surplus of $2.7 trillion (Source).  Since most Social Security payments come out of a tax that has been dedicated to those payments, I have deducted them from total Human Resource spending to get a more accurate picture of the trend in spending on the social safety net. 

When financial conservatives on both sides of the aisle warn of this upward trend, this is what they are talking about.

What too many Republicans won’t acknowledge is that we have had and continue to have a severe revenue problem.

Since I listen to and read a lot of “conservative” media each day, I repeatedly hear the mantra that Reagan lowered tax rates and revenues increased.  This is the justification for pushing for continued tax cuts. Reagan and a Democratic Congress lowered tax rates.  The president signs bills that are passed by the Congress.  This is not a one man show.  Total revenues, including Social Security and Medicare taxes, did increase because Social Security taxes were increased 12% during the Reagan years (Source).  When we look at tax revenues without Social Security taxes, revenues as a percent of GDP fell, just as anyone would expect when tax rates are reduced.  Since WW2, tax rates have been gradually reduced, and, as expected, tax revenues as a percentage of the economy have fallen.  There is no magic formula here.  Lower tax rates = lower revenue.

In this ongoing battle of ideologies, there are three real issues.  Should we spend more than 5% of GDP on active defense spending?  Should we spend more than 10% of GDP on social safety programs (excluding Social Security)?  Can we expect to ever live within our means if we collect only 10% of GDP in income and excise taxes?  We can not do all three.

Obama’s Fiscal Prudence

Two months ago I compared federal debt by Presidential administration.  Obama’s administration leads the pack.  This would lead one to assume that President Obama is a big spender.  He’s not.  In a WSJ MarketWatch article (I don’t think you need a subscription to see this article), Rex Nutting examined the historical data of federal spending from the Office of Management and Budget (OMB) and Congressional Budget Office (CBO). The data shows that the big spenders were Reagan and G.W. Bush.  What has plagued the Obama administration is a lack of revenue, particularly income tax revenue, because of the recession. 

In a balanced approach, Nutting gives proper due to the role Republicans in Congress have played, checking Congressional spending approvals.

Regardless of the data, we can expect that Republican pundits and political ads will continue to paint the Obama administration as the big daddy of  “tax and spend” Democratic Presidents.  To partisans of either party, when facts don’t conform to their ideology or preconceived notions, there must be something wrong with the facts.  Both parties rely on the fact that many voters vote with their guts, not their heads.

Starve The Beast

Fiscal realists have often championed a Starve the Beast theory, which aims to restrain the growth of government spending by restricting or reducing the growth of tax revenue to that government. The theory intuitively makes sense.  With less money to spend, politicians will be forced to lower spending.  During the past thirty years, however, the exact opposite has happened at the federal level.  When tax cuts were enacted, spending went up.  When taxes were raised, spending went down.  How to explain this curious phenomenon?

Jerry referred me to two articles written in 2004 and published by two think tanks commonly thought to be at opposite ends of the political spectrum, the libertarian leaning Cato Institute and the liberal leaning Brookings Institution.  In an article at, Mike Moffat cites a one page summary by William Niskanen, Chairman of the Cato Institute, of a study that Niskanen did in 2002 which examined the relationship between tax cuts and spending.  He found an inverse relationship; taxes went up, spending went down and vice versa.

Two authors at the Brookings Institution, also writing in 2004, examined the voting records of mostly Republican lawmakers who had taken the “No New Taxes” pledge that year and found that the majority were, in fact, liberal spenders.  In 2004, the authors predicted that the combination of tax cuts and liberal spending by a Republican majority would dramatically increase the deficits.  Ballooning deficits during the following four years did lead to a doubling of the national debt, just as they predicted.

How many of the 258 original pledge signers are still in office?  I don’t have time for that analysis but the Americans For Tax Reform lists 235 Representatives and 41 Senators in the upcoming Congress who have taken a reiteration of the no tax pledge, called the Taxpayer Protection Pledge.

This past weekend President Obama and Republican leaders from the upcoming Congress hammered out a “framework” of compromise over the renewal of the Bush Era tax cuts.  Republicans were adamant that the top 3 – 5% of incomes retain the slightly lower tax rates of the past decade.  While Democrats may ridicule Republican politicians as paid stooges for the rich, many Republicans openly took the pledge, were presumably voted or retained in office because of the pledge and are honoring that pledge to their voters.

 Neither Republicans or Democrats have taken a pledge to reduce spending.  Below is a graph of Federal spending without transfer payments like Social Security, unemployment insurance and other social welfare programs.

Notice that leveling off in the 90s?  To decrease the ballooning debt incurred during the Reagan years, taxes were increased in 1993 under the newly elected Clinton Administration.  Voters balked, sending Republicans to Congress in 1994 on a pledge to cut spending, which they did.  The Starve the Beast theory works in reverse.  When voters have to come up with more taxes now, they demand reductions in government spending.  When taxes are cut, voters lose any urgency to insist that their representatives cut spending.  They talk about leaving a tax burden for their children but they don’t flood the offices of their representatives with phone calls, letters and emails.  That flood happens when the tax burden for government spending falls on voters now

Federal spending is only a third of the problem.  The 50 states constitute 2/3 of total government spending.  Below is a graph, in real dollars, of total government spending less transfer payments.

Tax cuts produce less real tax revenue and disincentivize voters to scrutinize the spending habits of their elected officials, thus increasing our national debt.  Tax increases produce more real tax revenue and stir up a passion in voters to get spending in control, thus reducing the national debt.  Over the long term, the choice should be clear – increase taxes which cuts spending.

What is the framework that Obama and Republican leaders worked out this past weekend?  Provisions include a two year extension of the tax cuts for all income earners, a 2% payroll tax reduction, an extension of federal unemployment benefits and an accelerated write off of business investment.  The two year cost of this is over $850B.  In short, this is Stimulus 2, slightly larger in cost than the $800+ billion that Stimulus 1 cost.  Stimulus 1 featured stimulus spending controlled from the commanding heights of the federal and state government.  Stimulus 2, if passed, will feature spending controlled by the people and businesses of this country.  The real risk of Stimulus 2 is that the receivers of these tax breaks will not spend the savings but continue to pay down accumulated debt.  Businesses are already holding onto an estimated $2 trillion in cash, reluctant to invest the money until there is a sure sign that the economy is turning around and they can make some return on their investment. 

Will accelerated tax deductions for investment induce businesses to loosen their purse strings?  Stay tuned as the Great Recession continues….and continues.

Big Government

In the past 50 years, which administrations have shown the most restraint in federal spending? The answer surprised me. As this Heritage Foundation chart shows, they were all Democrats: Johnson, Carter and Clinton. Who were the big spenders? Bush and Reagan top the charts, besting even Johnson. Despite rhetoric about small government, Republican administrations have shown that they are the party of Big Government.

The Heritage Foundation, a conservative think tank, has culled data from a number of sources and presents them in colorful charts that make the data easier to understand. Here is a summary of various charts on federal spending.

David Walker, the former head of the General Accounting Office (GAO) under the Clinton and Bush Administrations, now heads a nonpartisan group that put together a documentary movie, “I.O.U.S.A”, that was released in 2008. You can view a 30 minute shorter version of the movie at You Tube.