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Posted at 6:00 AM ET, 03/ 1/2011

Mitch Daniels's memory lapse on the budget surplus

By Glenn Kessler

"It was the president and a Republican Congress and the Reagan peace dividend and a bubble economy, we later learned, that produced that surplus ... I was proud to serve in that administration, but that surplus was going away and it wouldn't have mattered who was president, let alone in the supporting role of budget director."
-- Indiana Gov. Mitchell E. Daniels Jr., Feb. 28, 2011

Mitch Daniels is the low-key governor of Indiana who, in some Republican circles, is considered a hot prospect for the 2012 presidential election because of his single-minded focus on the need to reduce the federal deficit. Daniels brings real credentials to the topic as well, because he served as George W. Bush's first budget director in addition to winning praise for his handling of Indiana's economy. Unusual for a Republican, he has proposed both tax increases and spending cuts to balance the state's budget.

As Bush's budget director, he is best remembered for being at the helm when Bush pushed through two large tax cuts in 2001 and 2003. In an interview with National Public Radio on Monday morning, he was asked if he was responsible for the disappearance of the projected budget surpluses, totaling $5.6 trillion over 10 years, after Bush became president. He responded with the quote above, arguing "that surplus was going away" no matter who had been president.

Daniels's answer is interesting on several levels, especially because of its selective remembering of history. Let's look at what really happened.

The Facts

Daniels cited four elements as responsible for the surplus: President Clinton, the GOP-led Congress, the [Ronald] Reagan peace dividend and "a bubble economy." Interestingly, he left out a very important player in both the peace dividend and significant deficit reduction -- President George H.W. Bush, Clinton's predecessor.

Historians continue to debate how much credit Ronald Reagan should get for the collapse of the Soviet Union -- but there is little doubt that Reagan's military buildup contributed to soaring budget deficits. Yet it was under Bush's watch that the transition to a post-Soviet world was expertly handled, including the reunification of Germany. Bush, moreover, instituted the huge decline in military spending that led to a 25 percent cut over five years, so he is directly responsible for the peace dividend.

Bush also agreed to a major deficit reduction bill that, at great political risk, caused him to renege on his pledge of "no new taxes." The Congressional Budget Office in 2000 estimated that on an inflation-adjusted basis, the Bush deficit reduction effort was larger than the one put in place by Clinton in 1993, without a single Republican vote. The Clinton effort was about half tax increases and half spending cuts. At the time, the Bush and Clinton efforts totaled about $1 trillion in deficit reduction in five years, which some economists say helped spur a decline in long-term interest rates.

That deficit reduction -- combined with lower-than-expected increases in health-care costs and higher tax revenue as unemployment fell and the stock market surged during the Internet revolution -- set the stage for the 1997 balanced budget deal between Clinton and the Republican-led Congress. Clinton had never articulated a goal of a balanced budget before the GOP seized control of Congress in 1994, but the task was made much easier by the booming economy.

Daniels also cited "a bubble economy" as being responsible for the surplus. Many listeners might have thought he was referring to the housing bubble that burst at the end of George W. Bush's presidency. Instead, he means stock market speculation in dot-com companies that popped in 2000. This helped bring forth a relatively mild recession, which was later exacerbated by the economic shock of the Sept. 11 attacks. The National Bureau of Economic Research officially dates the recession as beginning in March 2001 and ending eight months later.

The strangest part of Daniels's comment is his claim that the surplus was going to go away anyway. That's certainly not how Daniels and other Bush administration officials spoke at the time. In fact, officials expressed concern that too much of the national debt was being paid down so fast and so quickly that soon the U.S. government would be forced to buy assets because it had purchased every last publicly traded bond. (Then-Federal Reserve Chairman Alan Greenspan gave weight to this theory in a high-profile congressional appearance shortly after Bush took office in 2001.) In other words, the surplus was getting so big it was going to create economic harm.

Before the Sept. 11 attacks, Daniels and other officials took great pains to insist that, despite the tax cuts, the Bush administration would never need to dip into surplus Social Security funds to fund government operations.

"The nation has entered an era of solid surpluses," Daniels said on Aug. 22, 2001. "The nation is awash in extra money, and it's going to be." He made that statement after the administration acknowledged the 2001 tax cut, combined with a slowing economy, had all but eliminated the projected non-Social Security surplus.

All bets were off after the Sept. 11 attacks, of course, but the tax cut had taken away a major revenue source that could have helped fund the wars in Afghanistan and Iraq.

In the NPR interview, Daniels also defended the 2001 and 2003 tax cuts.

"They were widely credited -- and still are, by honest people, with the shallowness and the swiftness of recovery from that recession. That was lucky by the way, it's only fair to say, President Bush never proposed those tax cuts as a stimulus as we now see matter, 'cause nobody knew we had a recession starting up. But the timing was somewhat lucky. ... If you don't believe they had a positive economic impact, you can subtract them from what happened after, and you still had a whopping change because of two wars, the terrorist attack and the recession."


Actually, the Bush 2001 tax cuts are considered a mixed bag, both by conservative and liberal economists, in part because they were a mish-mash of tax policies concocted more as a campaign platform rather than to combat a recession -- which is one reason why another round of cuts were needed in 2003. One study, in fact, found that the 2001 tax cuts actually reduced economic activity. Bruce Bartlett, a policy adviser to Reagan and Bush's father, recently produced a useful summary on the data about the 2001 and 2003 tax cuts, concluding that there is "virtually no evidence in support of the Bush tax cuts as an economic elixir. ... Their main effect was simply to reduce the government's revenue, thereby increasing the budget deficit."

The Pinocchio Test

Daniels's recounting of economic history is misleading. He conveniently airbrushes out of the picture the Republican president -- George H.W. Bush -- who did the most to reduce the budget deficit. Instead, Daniels praises Reagan, who had helped create the soaring budget deficits that so bedeviled Bush and then Clinton.

Moreover, Daniels's assertion that the surplus was bound to disappear in any case is too cute by half. The projected surplus was the main reason why George W. Bush said - repeatedly - that the nation could afford a $1.6 trillion tax cut. Certainly, when Daniels was budget director, he did not suggest that the surplus was "going away."

The surplus vanished because of policy choices made by the president whom Daniels served -- some of which arguably left the nation less fiscally equipped to wage two major wars after the Sept. 11 attacks.

Three Pinocchios

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By Glenn Kessler  | March 1, 2011; 6:00 AM ET
Categories:  3 Pinocchios, Economy, Mitch Daniels  
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Comments

This article is pure spin. Daniels, one of the architects of the largest transfer of wealth in human history, is being considered as a possible presidential candidate?? By who?? The Koch brothers?? Who in their right mind would even consider electing this man who has helped rip off every single person in this country? It's appalling and obscene.

Posted by: greeenmtns | March 1, 2011 8:49 AM | Report abuse

This article should be required reading for every high-school and college student, and each local, state or federal government employee in this (what was once a great) nation. To use our political venues and mass-media to obfuscate or lie about something so crucial, an issue that we all should be very aware of--especially an issue that's been campaigned on by so many influential politicos--should carry the same courtroom-to-jailhouse penalties as the most serious charges of perjury carry. The American public suffer the consequences of lies/deceit, while the political perpetrators of shams and scams get their 6-figure tax-dollar salaries and perks. Those same office-holding obfuscators/liars also have staffs and "pet programs" in place that cost us 7- or 8-figures per year in deficit-spending. While they often pander to special interests, they rarely lead in anything resembling a judicious manner. Hmmmm.

Posted by: marc85 | March 1, 2011 9:24 AM | Report abuse

Three pinocchios for THAT?

I remember well right after the 2001 tax cuts a budget deficit of something like $330 billion resulted.

The Beltway aversion to math was more palpable than usual. Bush's $1.3 trillion tax cut (a CBO figure covering ten years) cost Uncle Sam about $100 billion in its first year, even assuming as the CBO is required by law (but not economics!) to do, that a tax cut produces ZERO economic growth. (That assumption has actually been used many times on WaPo comment boards to prove that tax cuts produce no economic growth, which only proves such commenters are boneheads.)

That's a $100 billion tax cut "causing" a budget surplus of $235 billion to become a deficit of $330 billion.

A $600 billion-plus swing caused by something the size of $100 billion? That silly argument was all the rage in the WaPo boards ten years ago.

Fact Checker has allowed readers to walk away with the impression that tax cuts don't stimulate the economy but perhaps that government 'stimulus' programs do. For goodness sake. Why not nationalize every industry?

Did Mitch Daniels actually say the 9/11 attacks, and the DHS, TSA, and other bureaucratic Leviathans that were to follow, would NOT bloat federal spending and hence the deficit?

If you look at income tax receipts over the past 60 years or so, you'll notice there's only one year where they exceeded 10%. That was in 2000, a year in which no tax policy changed or had recently changed. So why'd tax revenue shoot up that year? Well, that would be because of the bubble economy Daniels mentioned. Lots of people pulled money out of the stock market in the panic of March 2000. Those shares had been in the market a long time and were still sold at hefty profits, triggering enormous capital gains collections. Future USG revenue from that stream was depleted for the indefinite future.

(figures from http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=205 which is a liberal web site)

But what does that tell you about Clinton as a president? That he was a fiscal genius for having the stock market tank on his watch?

Fact Checker's sources are rather suspect, too. One of the two links is a liberal web site, with a tabloidy story discussing the arguments Bush had with advisors; the other is well, I don't know what it is because it's in Romanian. Could this Bruce Bartlett be a disgruntled ex-Reagan advisor? Or does he speak for the bulk of conservative economists?

It looks like the former. From WikiPedia: "There was and is considerable controversy over who benefited from the tax cuts and whether or not they have been effective in spurring sufficient growth."

Sounds like there's an argument on both sides, eh? Fact Checker missed half the story to load up a Republican with some extra pinocchios.

Posted by: angrydoug1 | March 1, 2011 9:45 AM | Report abuse

Thank you for providing me with a sound memory check! With so many politicians insisting (especially during the debate over extension) that the GW Bush tax cut began as a stimulus, I remembered the surplus being cited as the original reason for it.

Posted by: CherieOK | March 1, 2011 10:04 AM | Report abuse

Then we get to the 2003 American Dream Downpayment Act and the 2004 Zero Downpayment Act. Bush and Republicans Refusing to listen to Warnings that they could Cause huge losses due to Defaults on Housing loans in a Downturn of the Economy.

Then we get told Outsourcing will create Jobs. Horse Manure! It created Unemployment and Housing Defaults which brought down the Banks.

Posted by: ddoiron1 | March 1, 2011 10:09 AM | Report abuse


Let's not dress this pig up. Let's call it like it is. He lied. He's a Republican.. if his lips move that means he's lying.

Posted by: cmsatown | March 1, 2011 10:58 AM | Report abuse

Pinocchios go in both directions. Mr. Kessler just earned one.

"Clinton had never articulated a goal of a balanced budget before the GOP seized control of Congress in 1994."

While this "might" be technically true, from the outset of his Presidency, Clinton clearly articulated the concept of reducing the size of the Federal Government. As well as making it more efficient. I was an "inside the beltway" Federal Official (at NIH) during the entire Clinton administration. Reducing the deficit was a stated goal from day one of his administration. Perhaps it was only in '94 that it became clear that this might be achieved before the end of his second term. But was clearly a goal long before that. The steps that Clinton took to actually begin to raise Government revenues (increased taxes, reductions in expenditures in the military, etc) began to convince people he was really serious. And look what happened to the stock market (DOW or S&P500) in his first 4 years in office (no dot com bubble then). An average increase of well over 20% per year, based on the realization that this guy, unlike Reagan, was serious about the Federal deficit. And more economic activity (investments, etc.) produced higher Federal revenues, making the task of balancing the Federal budget easier. So here's an example of where tax increases led to an increase in economic activity. So Mr. Kessler gets one Pinocchio for his misleading statement.

Posted by: kenarmy | March 1, 2011 11:03 AM | Report abuse

The usual GOP revisionism.

Posted by: jckdoors | March 1, 2011 11:17 AM | Report abuse

Mitch Daniels, Dick Cheney and all the other crooks, liars, and war criminals on the Bush regime remind me of nothing but the Hitler regime.

I keep wondering when one of our presidential historians with sufficient balls is going to write an accurate book about this disgusting period of US history titled, "America's Hitler; the Regime of Insane-Emperor George W. Bush" --- and hopefully with a jacket cover of Bush in his military flight suit on the deck of USS Abraham Lincoln with the banner "Mission Accomplished", and the caption, "Mission Accomplished -- Fascism in the USA, with America's Hitler suited up for his Victory Jig".

I can't but wonder which will come first; such a book and honest admission by the US itself, or the international indictment of this insane egomaniac by other civilized countries for war crimes and crimes against humanity?

Alan MacDonald
Sanford, Maine
"Liberty over violent empire"
Party headquarters

Posted by: alanmd | March 1, 2011 11:38 AM | Report abuse

Angrydoug1:

Thanks for your comments. Actually, the swing from 2001 to 2002 was a $127 billion surplus to a $157 billion deficit, according to the historical tables in the 2004 budget. http://www.gpoaccess.gov/usbudget/fy04/pdf/hist.pdf

I agree that one cannot attribute all of this to the Bush tax cuts. The Joint Committee on Taxation estimate of the first year impact of the 2001 tax cut was $65 billion reduction in revenue; it quickly ramped up to about $145 billion, before the 2003 tax cut. So about 25 percent of the swing came from the tax cut in the first year, and increased after that.

My point was that the tax cut was sold on the idea that the surplus was going to be around for a long time, and in fact would threaten the health of the country because the US would run out of bonds to purchase. Look at this from the 2002 budget (go to page 29):

http://www.gpoaccess.gov/usbudget/fy02/pdf/blueprnt.pdf

So it is rather strange now to claim that it was always going to go away. Certainly, recession and war did their part, but policy choices were involved too.

Posted by: glennkessler | March 1, 2011 12:05 PM | Report abuse

Mitch daniels is just another tea-bagger republican LIAR.

Posted by: jeffc6578 | March 1, 2011 12:13 PM | Report abuse

Mr. Kessler,

Yes, about a quarter of the swing came from the tax cut, which continued to balloon from that point; the other part, of course, was punting the costs of the wars down the line. What was, even immediately, an expensive venture became ever more expensive, as the costs were pushed forward, and interest had to be paid on the debt. Thus there was a two-fold blow to the debt - the tax breaks, which did little to stimulate the economy, but which robbed it, not only of present income, but also of more in the way of future income; and the cost of an unfunded war, the tab which has been left to grow unchecked with interest accumulating on it for most of the past ten years. Although Obama has included the cost in current budgets, the tax structure still has not accounted for this expense, and so it continues to grow, so that we are, effectively, paying interest on interest.

As you say, Mr. Daniels, like many of his colleagues, has "selective memory," which may serve his cause well. Unfortunately it does not serve the American public well.

Posted by: garoth | March 1, 2011 12:32 PM | Report abuse

Who in their right mind would even consider electing this man who has helped rip off every single person in this country?
_________________________________________

Hoosiers who still think they got a good deal with the $300 Bush and Daniels gave them as a tax cut while giving their rich buddies billions

Posted by: Sanchos_ | March 1, 2011 12:54 PM | Report abuse

The fact that a surplus was claimed was highly misleading

The figures from the Treasury
Fiscal
Year End
Date Claimed
Surplus Public
Debt Intra-gov
Holdings Total National
Debt
FY1997 09/30/1997
$3.789667T $1.623478T $5.413146T
FY1998 09/30/1998
$69.2B $3.733864T $55.8B $1.792328T $168.9B $5.526193T $113B
FY1999 09/30/1999
$122.7B $3.636104T $97.8B $2.020166T $227.8B $5.656270T $130.1B
FY2000 09/29/2000
$230.0B $3.405303T $230.8B $2.268874T $248.7B $5.674178T $17.9B
FY2001 09/28/2001
$3.339310T $66.0B $2.468153T $199.3B $5.807463T $133.3B


Notice that while the public debt went down in each of those four years, the intragovernmental holdings went up each year by a far greater amount--and, in turn, the total national debt (which is public debt + intragovernmental holdings) went up. Therein lies the discrepancy.

When it is claimed that Clinton paid down the national debt, that is patently false--as can be seen, the national debt went up every single year. What Clinton did do was pay down the public debt--notice that the claimed surplus is relatively close to the decrease in the public debt for those years. But he paid down the public debt by borrowing far more money in the form of intragovernmental holdings (mostly Social Security).

In other words, Clinton's surplus would not have lasted (tech bubble, 9/11) and only came into being because of massive transfers from Social Security and other trust funds into the General revenue.

3 Pinnochios, but in the other direction when a surplus was claimed (at least, according to the Treasury deparmtent)

Posted by: PALADIN7E | March 1, 2011 1:30 PM | Report abuse

One aspect of the bubble that did burst was the spending to avert a "Y2K disaster". There was a lot of Government and private sector spending on that issue. Which resulted in a lot of systems being upgraded, that is new equipment and in some cases new SW. Then once the date change happened, they did not need as much spending for new systems, and a lot of people had no jobs. I was a Federal IT manager just before the Y2K drop dead date, and I remember the projected budgets being a lot less, although that was not the only reason for the drops.

Second item is that there is a difference between the total spending and the budget. Much "emergency" spending is off budget, which means that the budget could be balanced, while the national debt still grew. I blame both parties equally for this. While emergency relief might well be justified, and in many cases I think it is, it still should be put in as part of the overall budget. Yes there is a hardship, justifying extra spending, but not in my thinking, justifying "going off budget." Be honest.

Posted by: HappilyRetired2 | March 1, 2011 3:32 PM | Report abuse

Let's take Daniels' comment one piece at a time.

"It was the president and a Republican Congress and the Reagan peace dividend and a bubble economy, we later learned, that produced that surplus..."

This is a bit fuzzy, but makes four points.
1) He's saying the defense buildup LED by Reagan eventually caused the USSR to go belly-up and ENABLED Bush 41 and Clinton to lower defense spending levels, without an opposing superpower in the world. Check.
2) The 'Republican Congress' appears to be the Gingrich-led House of the 1990s which wanted to reduce the deficit faster than Clinton did, in that conflict often referenced today about the possible coming shutdown. Clinton deserves some credit for the budget surplus, but Gingrich deserves more. A bit reductive to leave out Clinton, but mostly true.
3) He references the "bubble economy", meaning the tech bubble. 10+% of GDP, a record amount, was collected in personal income taxes in 2000, and not because of a significant change in tax policy. There was lots of volatility in the crashing stock markets, especially the Nasdaq, and many people sold out and triggered capital gains taxes. That inherently dried up one of the USG's main revenue streams for years. In the early Bush years, Daniels may have thought - as many did - that average stock market performance would follow. Had it done so, significant capital gains revenues, though not to the 2000 level, would have made a big difference in the deficit picture. If the amounts are right (I can't find the right data), check.
4) He says "we later learned" meaning his statements made in 2000 did not have the benefit of knowing 9/11 and two wars were coming. Check.

"that surplus was going away and it wouldn't have mattered who was president, let alone in the supporting role of budget director."

Here, two more points; I'll go in reverse order.
1) NPR asked Daniels whether he created the deficit problem. By definition, an OMB director never does. Check.
2) The same point, only about the president. What Bush policies affected the deficit? Commonly mentioned ones are the 2001 tax cut, 2003 tax cut, and the two wars, and it's hard to come up with others. The 2001 tax cut was billed with a price tag of $1.3 trillion ($1.6 trillion was proposed but reduced by Congress). That figure was the CBO 10-year projection. I don't recall the 2003 cut's tag, but $300 billion comes to mind. And the Iraq and Afghanistan wars have cost about $1.3 trillion in their first ten years, per fas.org. That all adds to $2.9 trillion, assuming (with liberal fancy) that tax cuts create zero economic growth. So, there's at least another $5.6-2.9 = $3.7 trillion not explained by Bush's policy choices but a rosy boom year forecast. Thus, the surplus was going away. Check.

Daniels got the main question right and most of the background information right. One pinocchio would have been plenty.

Posted by: angrydoug1 | March 1, 2011 4:25 PM | Report abuse

Angrydoug1:

A fact check of the fact check! The awarding of pinocchios is by its nature subjective and the hardest part of my job. I awarded three mainly because of the gap between what he said then versus what he says now.

One technical note about the tax cut. Even though it was technically $1.35 trillion, it actually was the original $1.6 trillion over ten years. In order to fit within the ten-year budget frame, Congress ended it in the last year, thus "saving" $250 billion. That's why Obama and Congress had to have a debate last year about extending it. Normally, one would not sunset tax cuts--it's really not good policy--but lawmakers were determined to squeeze the full tax cut within the budget window. (It's all about the budget scoring -- the same game the Democrats pulled to show the health care bill "reduced" the deficit.)

Posted by: glennkessler | March 1, 2011 4:43 PM | Report abuse

Thank you for correcting me on the figures and your attention to my posts, Mr. Kessler.

Posted by: angrydoug1 | March 1, 2011 6:15 PM | Report abuse

The Fact Checker's critique of Daniels missis the point. The most striking fact about Federal budget deficits over the past 40+ years is their normalcy. It is the anomalous budget surplusses that require explanation, not the preceeding or succeeding deficits.

Daniels does make a reasonable stab at it. Whether one calls it the Reagan Peace Dividend, the George H. W. Bush Peace Dividend, or just the Peace Divend hardly matters. That event is rightly considered to be a major source of budget surplus. Daniels' other factors really weren't disputed as important contributing to the surplus.

There are important questions about the roles of government policies (particularly the Bush tax cuts of 2001 and 2003) on the end of the years of anomalous surplusses,and the return to normal deficits; but such enquries have the quality of asking why, after a rain in the dessert, did its climate revert to its previous aridity.

Particularly unhelpful is The Fact Checker's reliance on what Daniels said in the past. The Fact Checker purports to examine the facts about budget surpluses and deficits, not the facts about what Daniels said about them.

Posted by: MarkDavidovich | March 2, 2011 12:03 AM | Report abuse

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