Right-Wing Media Defend Low Tax Rates For Wealthy By Absurdly Calling For Clinton-Era Spending Levels

Blog ››› ››› JUSTIN BERRIER & ALBERT KLEINE

Right-wing media figures have attacked President Obama's proposal to increase tax rates on the wealthy to Clinton-era levels by suggesting the federal government should return to Clinton-era spending levels as well. But experts agree that the federal government's current spending levels are largely dictated by the economic downturn and an aging population.

On Fox News' The Five, co-host Andrea Tantaros reacted to an op-ed by investor Warren Buffett by saying, "Don't you love all this conversation about going back to Clinton-era tax rates, but no one wants to talk about going back to Clinton-era spending, right? That would be a far cry as well." On his radio program, Rush Limbaugh echoed Tantaros, saying the best way to argue against calls to raise taxes on the wealthy is to reply "OK, Mr. Democrat friend, then let's go back to the Clinton-era spending levels, too. How about that? If we had prosperity at the Clinton-era tax rates, and the Clinton-era spending, then let's cut spending."

But calling for a return to Clinton era spending levels ignores an array of economic issues. The most glaring problem with the comparison is the fact that it does not take into account the gap in economic output caused by the recent recession. The chart below shows potential GDP compared to actual GDP:

Output Gap

[Federal Reserve Bank of St. Louis, accessed 11/29/12]

According to the Economic Policy Institute, the output gap currently stands at approximately $775 billion. This is effectively a "denominator" issue when comparing current spending as a percentage of GDP to Clinton era figures - a decline in GDP due to the recession inflates spending to GDP ratios.

Because GDP growth was affected by the recession , looking at nominal levels of government spending relative to actual output show a sharp increase from 2008 to 2009:

 Nominal Spending

[Federal Reserve Bank of St. Louis, accessed 11/29/12]

However, the situation changes greatly when potential GDP is substituted for the denominator. Using the same methods as Nobel laureate Paul Krugman, the graph below shows that, instead of having government spending hover around 24 percent of GDP, it drops to about 22.5 percent. Additionally, the figure has been trending downward recently, and as the red line shows, is only slightly below a projection based on the path of growth in government spending established in the 2000s.

 Potential Spending

[Federal Reserve Bank of St. Louis, accessed 11/29/12]

The problem with comparing current government spending to Clinton-era levels is further compounded due to increased government spending directly related to the economic downturn in 2008. According to Ezra Klein, most of the rise in government spending during the recession was caused by increased outlays for programs such as unemployment insurance, food stamps, and Medicaid. Since spending on these programs is directly tied to the health of the economy, it is hardly shocking there has been a rise in government spending since Obama took office. This effectively contributed to the "numerator" of government spending as a percent of GDP, pushing it to current levels.

In addition, demographics have shifted dramatically, a fact that is driving a significant amount of the increase in federal spending. Center for American Progress senior fellow Matt Miller pointed out that reducing spending levels to 21 percent of GDP, as recommended by Erskine Bowles of the deficit reduction committee, is unrealistic given the aging population:

What's more, Reagan ran government at this size at a time when 76 million baby boomers weren't about to hit their rocking chairs. In 1988, 32 million retirees received Social Security and 33 million were on Medicare, our two biggest domestic programs. By 2020, about 48 million elderly Americans will receive Social Security, and 62 million Americans will be on Medicare (then the numbers really soar).

[...]

Split the difference, Bowles could have thought: Bring spending down 3 from 24, taxes up 3 from the average of 18 and call it a day. That can't be too big a lift, he must have reckoned -- after all, Bill Clinton left office with surpluses via spending at 18.2 percent and taxes at 20.6.

But here's what Bowles forgot. Clinton didn't have to retire the boomers. And Clinton abandoned the public investments that many advocates in both parties know are overdue -- from our massive infrastructure backlog, to our lagging research and development, to remedying the shameful fiscal inequities between rich and poor school districts, to luring a new generation of teaching talent to America's toughest classrooms. And on and on.

Posted In
Economy, Budget, Taxes
Network/Outlet
Fox News Channel, Premiere Radio Networks
Person
Rush Limbaugh, Andrea Tantaros
Show/Publication
The Rush Limbaugh Show, The Five
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