There's nothing new about big-spending presidents

C. Eugene Steuerle

Which presidents were the biggest domestic spenders in the 20th century? Contrary to most people's expectations, higher domestic spending growth occurred under the watch of Republican rather than Democratic presidents. This is because domestic government activity has been less a result of presidential ideology than of opportunity or crisis.

That is not to say that the Republicans are the real "big government" party. In fact, domestic spending over the last century has had little relation to campaign promises to expand or contract government. Instead, it has been driven by more practical considerations -- the expansion and contraction of available sources of financing for government activities.

Today, the easy financing mechanisms that fueled most of the 20th-century domestic spending growth no longer are available. This, combined with the high and automatic expansion of entitlements, is driving the long-term budget crunch. The floundering of government is far more than an issue of changing ideologies or philosophies of government. A primary cause is the dramatic reversal in fiscal flexibility.

Over the last 100 years, of the five presidents who reigned over the largest domestic spending growth, four were Republicans. Taken in order of expenditures, they were Richard Nixon, Herbert Hoover, Dwight Eisenhower, Harry S. Truman (the lone Democrat), and George Bush. This ranking was obtained by measuring the change in domestic spending as a percentage of gross domestic product (GDP) between the fiscal year of a president's inauguration and that of his successor's inauguration. For example, the measure for Bush would be the change in domestic spending as a percentage of GDP between Fiscal Years 1989 and 1993.

Presidential ideology and political party do not appear to play a strong role in determining domestic spending. The top two spenders -- Nixon and Hoover -- are considered to be among the most conservative of the century. Yet, together they produced almost three-quarters of the domestic spending growth over the 100-year span.

In contrast, the liberal New Dealer, Franklin D. Roosevelt, is at the bottom of the list. Domestic spending actually fell by 3.6% of GDP during his tenure. The main factor was that the massive World War II defense buildup crowded out domestic spending. Under FDR. defense outlays increased by 37% of GDP. Domestic spending fell as the nation devoted more than a third of its resources to the war effort.

Perhaps more importantly, FDR's New Deal programs primarily were short-run or counter-cyclical in nature, focusing on unemployment compensation and jobs. Much of the spending was not intended to be permanent and, by the end of his presidency in 1945, the nation had reached the full employment levels of World War II. Non-cyclical programs, such as retirement and health, remained quite small. Even at the end of the Truman Administration in 1953, domestic spending was 1.6% lower than it had been when FDR took office two decades earlier. Finally, much of the rise in domestic spending in response to the Depression occurred prior to Roosevelt's presidency, under Hoover.

Moreover, from the turn of the century until the end of the Wilson Administration in 1921. the Progressive Era presidents did not increase their domestic expenditures by much. Spending on domestic programs fell under William Howard Taft and, when combined with outlays under Theodore Roosevelt and Woodrow Wilson, yielded almost no growth for this era (a net increase of merely 0.6% of GDP).

During the Progressive years, activist governments focused on strengthening regulation of monopolies. food, drugs, railroads, and currency. rather than increasing social programs. The government continued to concentrate domestic spending on veterans. as had been done since the Civil War. Outlays for veterans accounted for well over 40% of domestic expenditures for almost all of the Progressive era.

Bill Clinton often is considered a supporter of activist government. but domestic spending is not likely to rise under his administration, either. Over his first term. it went up by just .01% of GDP, and under the 1997 budget agreement, it would fall by about that same amount over his two terms combined.

Ronald Reagan performed closer to expectations. Domestic spending fell by two percent of GDP. the largest drop of all 20th-century administrations other than that of FDR. The Reagan defense buildup added significantly to the pressure on domestic spending. Cutbacks in the latter quickly were eliminated during the Bush presidency, at least in the aggregate.

Regardless of the political party in the White House, domestic spending growth usually has occurred only when easy financing mechanisms were available. The most important factor affecting government spending over the last 50 years was the relative decline in the defense budget. Since the Korean War, it has dropped from about 14% to 3.4% of GDP.

The drop since then amounts to about $800,000,000,000 more annually -- roughly $8,000 per household -- that now can be spent on domestic programs. This is on top of the hundreds of billions provided by simple growth in the economy, even while there was no significant change in average tax rates when all Federal taxes are taken into account.

Now, it is easy to understand why some presidents were big spenders -- they got to spend peace dividends. Truman did so after World War II, Eisenhower after the Korean War, Nixon as the Vietnam War wound down. and Bush in the post-Cold War era.

Apart from defense, other methods of easy financing were available in the first few decades after World War II. These allowed Eisenhower, John F. Kennedy, Lyndon Johnson, and Nixon to increase domestic spending more easily than other presidents. Rising inflation from the end of the Korean War until the late 1970s eroded the value of government debt, acting like a large tax on holders of outstanding bonds. This allowed the government to run significant deficits even while its debt-to-GDP ratio generally was failing.

Bracket creep in the individual income tax was another method of easy financing. Inflation and the strong economic growth of the period (at least until it slowed in the mid 1970s) pushed taxpayers into higher tax brackets. These sources of funds allowed the government to raise support for many domestic programs without appearing to pay for them through legislated tax increases or reductions in other programs.

Steady increases in Social Security taxes provided yet more easy financing. The payroll tax rate rose about three percentage points per decade from 1950 to 1990, from three percent to 15.3% of taxable wages. Payroll tax increases during most of this period were hardly noticed. The tax started out small; changes were deferred until years after legislation passed; and most voters at the time were promised lifetime benefits far in excess of taxes to be paid.

None of these methods of easy financing is readily available today. Defense spending as a percentage of GDP soon will fall below its lowest point since 1948. This means there is a limit on the amount of funds that could be transferred from defense to domestic spending, even if the military budget were shaved further. There is little or no peace diviend left, and what does remain already has been committed. No additional $800,000.000,000 will be available to transfer to domestic spending without raising taxes.

Government no longer can depend on inflation to erode the value of government debt. In the late 1970s, the Federal Reserve Board began an aggressive anti-inflation effort that has led to lower rates of inflation. Government now pays higher rates on its outstanding debt than it does on new debt. Bracket creep in the individual income tax, which in the past brought government more revenue, has been curtailed by indexing of tax brackets for inflation since 1984. The Social Security tax rate already is higher than it has ever been, and the public is far more resistant to further increases. The system no longer is able to make every cohort of senior citizens a winner by passing on higher and higher financing obligations to future generations.

Fiscal policy not only moved away from easy financing, it moved into a straitjacket. What is fairly unique today, in comparison to much of American history, is that domestic policymaking is determined primarily by previous voters and policymakers. Their principal control comes from the entitlement programs, enacted in the past, that increasingly dominate Federal government activity. The continuous growth of programs such as Social Security, Medicare, and Medicaid means that revenue growth for tomorrow already is spent. Indeed. it is overcommitted.

This predicament is illustrated by the dramatic change in the composition of government outlays over time. Entitlement spending soared from 28% of total expenditures in 1962 to 53% in 1995, while discretionary spending fell from 66% to 28%. (The remainder represents payments of interest on the debt, which has put added pressure on domestic spending since the late 1970s.)

The shift from discretionary spending to entitlement and interest payments on the debt severely has curtailed the ability to address current needs or respond to today's voter interests. Entitlements are not temporary or designed to respond to any current measure of need.

Perhaps even more important than these factors is entitlements' scheduled rate of future growth, regardless of the status of the economy. Outlays for programs such as Social Security and Medicare increase faster than the economy, so the revenues made available by economic expansion are prespent on such entitlements. This pressure forces discretionary programs as well as entitlements without built-in growth into further decline. Expenditures on today's entitlements, therefore, are intrinsically different from domestic spending of the New Deal. because FDR's programs were designed primarily to be temporary in nature.

This fiscal straitjacket explains the effects the Republican and Democratic balanced budget agreement will have on the size and composition of government. Domestic spending as a percentage of GDP will not grow, defense spending will remain on a decline, and entitlements will continue to crowd out discretionary spending.

The above presidential rankings obviously skip over important factors such as composition of the Congress, precedents set by one administration and followed by the next. and public demands. The purpose is not to grade the presidents by this ranking, but to draw three important lessons for the future.

First, entitlement growth and the demise of postwar easy financing options continue to constrain government's ability to respond to current needs. As long as future added revenue entirely is precommitted, deficit reduction alone -- at least of the type the nation has had for the last 15 years -- never will remove that constraint. Not even a balanced budget provides a cure. Pressure on discretionary programs such as community development and educational opportunity for children -- initiatives without built-in growth -- will not be relieved until precommitted growth for other programs is brought under control and a more level playing field is established.

Second, if younger generations have become less accepting of government, it is partly because they are denied ownership of current budgets. Third, presidents' budget policies should be graded less on their political philosophies and more on their vision in dealing with the fiscal opportunities and constraints that prevailed during their time in the White House.

COPYRIGHT 1998 Society for the Advancement of Education
COPYRIGHT 2008 Gale, Cengage Learning