Bad Economics and Distortions of 1990 Budget Agreement Hold Deficit Reduction Hostage

May 13, 2011 at 1:20 pm

House Speaker John Boehner declared this week that huge spending cuts are a prerequisite for raising the debt limit and that tax increases are off the table in deficit reduction negotiations.  Commentators have sharply criticized his rationale, calling it “economic illiteracy,” “gibberish,” and an “incoherent, impervious-to-facts economic philosophy.”  The Speaker also gets his history wrong by denigrating the landmark 1990 budget agreement and misrepresenting the relationship between tax policy and economic performance over the past two decades.

We’ve weighed in here, here, and here on how Speaker Boehner and other Republican lawmakers’ economic arguments are detached from the reality of our economic and budget situation.  The Speaker also has potentially undermined serious budget negotiations by creating his own history of the 1990 budget agreement.

In Boehner’s telling, the 1990 agreement was a “so-called bargain” that caused “the recession of the early 1990s.”  The truth is that the recession began in July 1990, the bipartisan budget agreement was enacted in November, and the longest economic recovery on record started in March 1991.  The combination of the strong recovery and the 1990 agreement, which reduced the deficit by $500 billion over five years with a balanced package of tax increases and spending cuts, paved the way for  a balanced budget by the end of the decade.

The Speaker also repeats the Republican shibboleth that raising taxes is the enemy of growth.  That’s what they said in 1993 when President Clinton and a Democratic Congress—with no Republican votes—enacted a tax increase on top earners.  As the chart shows, job creation and economic growth were significantly stronger in the recovery following the Clinton tax increase than they were following the 2001 Bush tax cut. And the Clinton policies produced a balanced budget.

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More About Chad Stone

Chad Stone

Chad Stone is Chief Economist at the Center on Budget and Policy Priorities, where he specializes in the economic analysis of budget and policy issues. You can follow him on Twitter @ChadCBPP.

Full bio | Blog Archive | Research archive at CBPP.org

9 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    Basic economics shows that higher tax rates on the rich encourages them to re-invest in their businesses instead of taking profits as income. You don’t pay income tax on money that you keep in your business – and retained earnings creates jobs!

    • 2

      Rewinn:

      Your comment is right on the mark and we need politicians to start offering proposals that focus on problems. We need taxes and cuts. The GOP aims for programs that aid the middle class and poor but ignore our two (or is it three) wars and the heavily bloated military budget.
      This talk of reducing the deficit without raising taxes is moronic. “Real” wages for the middle class have been stagnant or falling while the filthy rich (the top.01 percent) quadrupled their wealth over the last decade. The top 1 percent of earners in this country are paid almost 24 percent of all wages and they possess almost 40 percent of the wealth. (When Reagan took office, the top 1 percent took in less than 10 percent of all wages.)
      New laws and business practices have gutted the unions which affects all workers. Non-union companies traditionally kept pace with unions to attract quality workers and keep unions out. Germany’s economy is recovering nicely not because of their austerity measures but because the government there PAID businesses to retain workers during the meltdown. The Germans have kept manufacturing at home and have a strong export market. The absence of a housing bubble there helped.
      Income inequality in the U.S. has become so bad that we’re ranked dead last among developed countries. Even China and Russia have more equality in wages than we do. I read a recent story about what the super-rich did with their huge increase in wealth over the last decade. None talked about job development. One got a bigger boat, many traveled more and one guy installed a custom dance floor in his home. Many said they were content to “sit” on their money, watching the pile grow.
      With our debt situation, I find it appalling that the GOP fought to keep the uber rich from higher tax rates. An increase will have no impact on their lifestyles. Meanwhile, I see more “common” people staying at home during their one or two weeks of vacation.
      The number of poor in the U.S. grows. If the super rich stop counting their money for a moment, they may someday see hordes of the down-and-out coming with pitchforks.

    • Robert Hartl #
      3

      Most of the rich people that I know in business invest their money that they have earned in foreign production. The adage the “Capital seeks value” is the rational that most business men and women use when making decisions on capital deployment. Furthermore, most of those people then ship product to offshore holding companies that retain profit tax free and then reinvest in production in foreign countries. U.S. and European capital has created the East Asian economic giants that will soon dominate the rest of the world. In the meantime the U.S. has gone into massive debt trying to protect U.S. corporate interests.

  2. 4

    Clearly, there is an argument for tax increases under our current monetary system. But that also brings more borrowing at interest. This cycle has been repeated to our domestic and international financial detriment. Would it be possible for the CBPP to present the issue of why the Federal, State and local governments must pay interest on “fiat money” created by the Federal government?

    Have we been brainwashed into thinking that the Fed. gov. & all political jurisdictions are profit centers from which banks must earn income on fiat money? How does this aid the poor and middle class. They have and will likely remain indentured servants with incomes confiscated to pay debt service–bondholder dividends–in perpetuity.

    Can we not return to a public paper money system a la President Lincoln and his Greenbacks which were legal tender and not promises to pay. After all they won a war and reignited the American Industrial Revolution. While the South was bankrupt it too issued debt free currency to prosecute it’s war, but counterfieters destroyed there multi-currency system. Yet te South had no debt.

    Couldn’t CBPP champion a monetary system which eliminates enormous financial burden on the poor and middle class and which could evolve to eliminate corporate and individual income taxes? After all no debt means no taxation, for the most part.

    This is the SILVER BULLET if presented to Americans as an alternative to higher taxes and draconian program cuts.

    • 5

      there is noway you can balance the budget by cutting the spending . you cannot cut enough. you would have to cut out the whole defense budget and all entitlememts not including Social Security Becouse it is not an entitlement we the people pay for all of it . it is not and never has been part of the budget it is a stand alone program. Medicare is also 1/2 of it is a stand alond program because it comes our of our checks every week seperate from income taxes .If Ryan wants to do away with Medicare then I want my money I paid in from 1965 untill now.the Goplike to cut taxes for the rich and they are the ones that can pay them the easest because they cut their own taxes by doing this .

      • Jack Shipley #
        6

        You know, James, you might demand that of Mr. Ryan. Wonder whether 40 years of contributions to Medicare would buy me an annuity to cover my health care needs?

      • George Macaulay #
        7

        Social Security is a tax and a welfare program. The rules can be changed by Congress at any time. You do not have any right to the money you put in, any more than you have a right to any taxes you have paid. Same thing for Medicare. Bush tried to privatize SS allowing the money put in to be yours, but that idea was defeated by the Dems.

        As for revenue, there are two ways to do it – increase taxes or grow the economy. The left always looks to increase taxes, which is sad. Creating new jobs – private sector jobs – would also increase revenue. Providing incentives for businesses to expand here in the U.S. – like slashing or eliminating corporate income taxes would be a much better option than increasing taxes.

        • Sd #
          8

          You are wrong tax cuts do not work at all

        • Chris #
          9

          I think you’ve made at least two inaccurate statements.

          Social security is NOT a welfare program, it’s a retirement program, which means you essentially start getting the money back that you put in after a retirement age. We pay income taxes (you said, “any taxes”) because our government can’t run without a certain amount of funding. There’s certainly no expectation by anyone that we would ever get a single dime back from funding the operations of our government. It’s logical to think we would have the right to ask for our SS contributions back if the program is cut.

          Please stop assuming that increasing taxes and growing the economy are mutually exclusive. History has already proven they’re not.



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