Mitch Daniels's memory lapse on the budget surplus
"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.
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.
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.
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