Do These Deficits Look Familiar?

Meet Richard Milhous Bush

Jonathan Rauch | January 26, 2004

A polarizing Republican president, reviled by liberals, unseats the Democrats, talks like a conservative, but then sails blithely into a cataract of red ink. President Bush's record is beginning to shape up that way, uncannily resembling the record of—Ronald Reagan?

Well, yes, the resemblance is there for all to see, and Bush no doubt draws reassurance from it. A sharp fiscal deterioration fed by reductions in taxes, increases in defense spending, and a recession: Where have we seen this before? From a fiscal point of view, however, the early 2000s resemble not just the early 1980s and the Reagan era but also— perhaps even more—the early 1970s and the Nixon era. Which is not a resemblance that Bush or the Republican leadership in Congress should find reassuring.

On the principle that, once in a while, the past provides some insight into the future, consider for a moment the Nixon era, defined broadly to include the Ford administration, which largely continued Nixon's domestic policies.

The economy boomed in the 1960s, growing at 4.7 percent a year (in inflation-adjusted dollars), on average, from 1962 to 1968. Revenues poured in the door, and President Johnson and the Democratic Congress—then as now, the same party controlled both branches—celebrated the bounty with a host of federal initiatives. But stingy Southern conservatives still ruled the Capitol, and so Johnson tended to seed the ground with fistfuls of new but small programs, most of them funded modestly but good for lines in speeches. (Some of them, notably Medicare, were acorns from which mighty oaks would grow, but that would come later.)

Except in the peak war year of 1968, deficits in the prosperous 1960s ran at or below about 1 percent of the gross domestic product. The war was expensive, and for a while, Johnson tried having guns and butter, but in June of 1968, shortly before the election, he imposed a 10 percent surtax on individuals and corporations. That and some finagling helped him post a small surplus for fiscal 1969. But the surtax was temporary (it ended in 1970). As Johnson's term ended, the country's fiscal situation was unsettled. The next president could make things a good deal better, or he could make them much worse. Along came Nixon. Not a man known for making things better.

Nixon cared little for domestic policy, but he regarded himself as a conservative reformer, he wanted to make a mark on history, and he was swayed by the enlightened economic wisdom of his day, which was liberal by today's standards. Above all, Nixon, being Nixon, was determined to snatch up every inch of desirable political real estate, rather than give a Democratic opponent anything to run on.

And so he watered and fertilized LBJ's Great Society seedlings while proposing not a few big-government initiatives of his own—most memorably a "Family Assistance Plan" that would have guaranteed a federal payment of $1,600 (about $8,000 in today's money) to every family of four with no income, a scheme that would have added as many as 12 million people to the welfare rolls. (To their everlasting regret, congressional liberals helped kill the plan, insisting it was too stingy—a mistake their successors did not repeat last year with Bush's new prescription drug benefit for Medicare.) Nondefense discretionary spending, 3.2 percent of GDP in fiscal 1969, rose to 4 percent in fiscal 1975 and to 4.6 percent by fiscal 1977, President Ford's last budget year.

Nixon spent even faster on entitlements. Fearing that an economic downturn might damage his re-election prospects, he agreed in 1972 to a stunning 20 percent permanent increase in Social Security benefits. The increase originated with House Ways and Means Committee Chairman Wilbur Mills of Arkansas, a Democrat who got it into his head to run for president. Nixon, determined as ever not to be outflanked, briefly resisted but then, waving his hat, climbed aboard the gravy train. He signed the increase into law in September 1972, in time for seniors to receive their fattened checks on October 1, a month before the election.

The increase was so large that it accounted for more than half of the growth in personal income in the fourth quarter of 1972. In case anyone missed the point, the administration helpfully sent out notices letting seniors know that their Social Security checks had swelled.

Thanks to that and other examples of Nixon's generosity, entitlement spending grew from 6.5 percent of GDP in 1969 to 10.6 percent in 1975, an unprecedented increase. Nixon managed to pay for more than half of this new domestic spending by cutting defense as the Vietnam War wound down. But the peace dividend proved to be merely a temporary windfall; the defense cuts overshot, and detente collapsed. By the late 1970s, President Carter found himself obliged to reverse course and begin a defense buildup, which Reagan accelerated.

And so, by the time of Ford and Carter, the government was running chronic deficits of between 2 and 4 percent of GDP. Filling that fiscal hole was to be the preoccupation of every president from Carter to Clinton.

Reagan is generally blamed for the deficit crisis of the 1980s and early 1990s. He certainly made a bad situation worse, running a deficit that reached a recessionary peak of 6 percent of GDP. Remember, though, that the deficit was already 2.6 percent of GDP when Reagan took office, and it was 2.8 percent when he left. He and Congress revoked a substantial share of the 1981 tax cut, and by 1987 the defense budget was coming down almost as fast as it had gone up.

In other words, Reagan doubled the deficit as a share of GDP, but only briefly. The underlying fiscal dislocation was largely the work of Nixon, who let—no, helped— federal spending run away from federal revenues, not just for a while but for good. Resolving Reagan's fiscal rupture—that is, reducing the deficit to pre-Reagan levels, as a share of GDP—took only four years (from 1983 to 1987); resolving Nixon's took 20.

And George W. Bush? Obviously, he is personally not much like Nixon. But his fiscal legacy looks in danger of being similar. The budget, firmly in surplus when he took office, is now in the red, possibly for years to come; his tax cuts and spending increases account for much, though far from all, of the change. Congress, by exceeding Bush's spending requests, has compounded the problem. With the budgetary vise of the Baby Boom generation's retirement soon to begin closing, the country may be on the verge of a 20-year fiscal crisis much like the one Nixon bequeathed.

"After only three years in office, President Bush may be heading to the record books as one of the biggest-spending presidents," writes Veronique de Rugy, a fiscal policy analyst, in a new Cato Institute report ("The Republican Spending Explosion"). She notes that real spending increases in fiscal 2002, 2003, and 2004 have averaged more than 7 percent—versus 1.5 percent over the past 40 years.