The top item on President Obama's agenda in the fiscal cliff negotiations is a higher tax rate on top earners. If the election was about anything, Obama says, it was about his promise to raise taxes on the wealthy back to Clinton-era rates.
A big part of the president's campaign-trail case for raising taxes on top earners is that Bill Clinton did it, and it worked pretty well for him—and for the rest of the country too. On the campaign trail, President Obama often invoked his Democratic predecessor when arguing for higher rates: “If you make $3 million, then we’re going to go take the rest of it and tax that a little bit more at the rate we taxed it under Bill Clinton,” he said at an August campaign event in Colorado. Clinton’s economic plan, he told a rally in Wisconsin, “asked the wealthiest Americans to pay a little bit more so we could reduce our deficit and still invest in the skills and ideas of our people.” And that economic plan, the president would note, coincided with an economic boom: “I also want to ask the wealthiest households, including my own, to pay a little bit more on incomes over $250,000, the same rate we had when Bill Clinton was President, the same rate we had when we created 23 million new jobs, went from deficit to surplus, created a whole lot of millionaires to boot,” he said at a September event in Nevada.
The implication is that higher tax rates can pave the way to economic growth. The evidence on that question, however, is mixed. It’s true that many studies show that changes in taxes don’t have a big short term effect on the labor supply. But as Michael Keane University of New South Wales economist pointed out in a recent survey of studies on the issue, a sizable minority of studies show a large effect. Keane’s survey also reports that labor force participation by women is heavily affected by tax changes, which suggests that in the long term tax changes can matter quite a bit. Still, it’s hard to be too confident about any of this because we really don’t have a great idea of which policies tend to lead to economic growth, especially over time. One way to read a recent Congressional Research Service report on how taxes affect the economy is that nothing affects economic growth.
But let’s put all that aside for now. Most of us can agree that the Clinton years, which saw growing median incomes as well as tiny deficits and steady economic growth, were economic good times, and we’d all like to see that sort of economic performance repeated. If that’s the case, then why should we limit ourselves to just replicating one tiny fragment of Clinton-era governance—higher tax rates on a fairly small number of earners? Why not replicate other aspects of Clinton’s policy mix as well?
Probably because that would entail mentioning something that Obama’s frequent invocations of the Clinton years always ignore: that Clinton’s spending levels were far, far lower than they have been for the last four years—or than President Obama has called for them to be in the years to come.
That’s true no matter how you measure it.
Government spending as a percentage of the economy fell during the Clinton presidency, starting at 21.4 percent and finishing up at about 18.2 percent of GDP in both 2000 and 2001. In 1993, Clinton’s first budget spent $1.4 trillion. The last budget he helped create spent $1.8 trillion. So far, President Obama has spent about $3.5 trillion every year, averaging more than 24 percent of GDP.
Republicans would, of course, find their own reasons to oppose budgets that looked more like Clinton’s. Not only would they object to higher tax rates, they would also be appalled by Clinton’s defense budgets, which were quite small compared to today’s bloated military appropriations. Clinton spent an average of about $377 billion on defense each year, compared with annual spending that’s risen past the $700 billion mark under President Obama. Clinton actually let spending on defense fall each year he was in office. Today, on the other hand, Republicans are working desperately to prevent defense “cuts” in the sequester that would let military spending continue to grow over the next decade.
A truer Clintonian agenda, meanwhile, wouldn’t only complicate President Obama’s spending plans. It would also require Obama to openly pursue higher tax rates on middle class earners as well as their wealthier counterparts—something he and many in his part have explicitly rejected. Indeed, such an agenda would be difficult in part because it would reveal the true cost of the federal government. We may not know exactly what policy mix is the absolute best for economic growth. But we do know that Clinton's economy was strong, and that he came as close as any modern president to balancing the federal budget—and he did it both by taxing most everyone at higher rates and by spending a lot less on the federal government than we do now.