Obama Spends Less than Reagan

While European politicians are busy declaring the end of the economic crisis in Europe, Americans have seen their economy pick up speed for a good year now. Inflation-adjusted quarterly growth figures during 2013 actually looked encouraging: compared to the same quarter a year earlier, U.S. GDP grew, respectively, 1.3 percent, 1.6 percent, 2.0 percent and 2.7 percent.

It remains to be seen if the upward trend in growth continues through 2014. We should keep in mind that these growth numbers are from a year when Obamacare had not yet gone into effect. That law is still hanging like a Damocles sword over businesses and households, though more and more point to the entire law slowly withering away. There is also the problem with the federal government’s regulatory assembly line, which continues to fire off artillery round after artillery round of regulations at America’s businesses and entrepreneurs.

My impression is that businesses are beginning to bet on the Obamacare law to eventually go away, or at least be reduced to somewhat of an expanded Medicaid program. This would partly explain the slow but visible growth in private-sector activity in most corners of the great country. If the federal government could declare regulatory cease-fire – and chances are they will if the Republicans take the Senate in the fall – then things could get pretty good.

But there is one variable that contributes even more to the recovery – no matter how weak it is – namely the remarkable restraint in federal spending.

If you ask the next guy you meet in the mall parking lot what American president is the biggest spender of them all, chances are the answer will be “Obama”. Conventional wisdom says that Obama is a major spender of other people’s money, regardless of whether it is taxes or debt. It is easy to understand this when Obama declares that the era of austerity is over:

With the 2015 budget request, Obama will call for an end to the era of austerity that has dogged much of his presidency and to his efforts to find common ground with Republicans. Instead, the president will focus on pumping new cash into job training, early-childhood education and other programs aimed at bolstering the middle class, providing Democrats with a policy blueprint heading into the midterm elections.

When you demand more government spending, and when that spending is of the classical entitlement kind, you should not be surprised if you are characterized as the biggest spender.

Chances are, though, that Obama will not get to spend all the extra money he wants to. Once the budget gets to Congress it will meet solid resistance from Republicans, and this time around they will find lots of allies among reelection-minded Democrats.

It is entirely possible that the president knows this, and that his spending rhetoric is little more than the same kind of hot air we hear so much of in election years. In fact, it would be better for the president if his spending proposals fell flat to the ground in Congress than if he got what he wanted. So far he has a pretty good track record for federal spending: after the big mistake we all know as the American Recovery and Reinvestment Act, or the Stimulus Bill, which increased federal spending by 17.9 percent in one year, the average growth rate for Uncle Sam’s outlays has been 1.2 percent per year. (It is 4.8 percent per year if we include the stimulus year of 2009.)

Some, like Dan Mitchell over at the Cato Institute, rightly make the point that the restraint in spending coincides with the Tea Party movement making inroads into the Republican caucus on Capitol Hill. But in addition to that Obama seems to have been fine with almost flat spending. Whatever his reasons, he deserves recognition for having shown this restraint.

One possibility is that the president knows that if he would allow the federal deficit to spin completely out of control, as it was beginning to do back in 2009 and 2010, his entire legacy would be overshadowed by that. More importantly, it is easier to get Congress to focus on other issues than the deficit if the deficit is shrinking.

According to the Office of the Management of the Budget, 2013 represents the first year under Obama when the federal deficit will be less than a trillion dollars. So far that is only an estimate, but if the current trend continues, then by 2018 the deficit will be back at 2005-2006 levels.

In all, this positive deficit trend helps reinforce confidence in the U.S. economy. It also helps ease the pressure on interest rates that in 2013 pushed U.S. Treasury Bonds higher than some European countries. As the budget deficit declines, Federal Reserve chairwoman Janet Yellen will get a good opportunity to phase out the Quantitative Easing program. Some people already expect this to happen, which contributes to a reduction in inflation expectations and strengthened confidence in the U.S. dollar.

All this together helps the economy continue its slow but visible recovery.

However, even if Obama works with Congress to keep a tight leash on federal spending we are eventually going to see federal spending increase again. In fairness, it is already happening to some degree: the OMB estimate for 2013 is that spending went up by 4.2 percent; for the remaining three years of Obama’s presidency the OMB predicts an average of 3.5 percent per year.

For his entire presidency, Obama would then average 4.2 percent per year in spending increases. Deducted the one-time spike in 2009 his average would fall to an exceptionally good 2.2 percent, but even with that included – as it should be – he will retire with a far better spending record than his predecessor. Over his eight years in office, George W Bush presided over a budget that grew, on average, by 6.6 percent per year, with the second term seeing faster spending increases than the first (6.8 vs. 6.4).

Bill Clinton beats them both. Working as he did with a Republican-controlled Congress, he kept the federal budget growing at a respectably low 3.3 percent per year. Reagan, by contrast, joined the Democrat majority in Congress and expanded spending by an annual average of 7.7 percent per year.

Based on these historical numbers, the best outlook for federal spending restraint is therefore that the Republicans take the Senate in November and Obama drops his demands for more entitlement spending. If he kept spending completely flat in his last two years in office he would actually beat Clinton by a tiny margin for the most spending-frugal president in recent history.

The chances of that happening are not good, though. The federal budget is driven by an enormous system of entitlement programs. Some are entirely federally funded, costing taxpayers $1.8 trillion per year; other programs are co-funded with the states and add almost half a trillion dollars in federal spending. These programs not only cost a lot as they are, but they often have spending parameters built into them that cause spending to rise automatically.

Consider this chart:

BOspendChart1 Source: Financial Accounts of the United States, Federal Reserve; and the Office of the Management of the Budget.

Take a look at the blue spending trajectory from 1995 to 2010. It illustrates the accelerating average annual spending during the Clinton and Bush presidencies.

In five out of Bush’s eight years in office, federal spending grew at more than seven percent per year. Even if some of the spending increases under Bush were related to the military build-up, the underlying trend of faster growing spending was driven by ever costlier, ever more generous entitlement programs.

Obama is not the big spending problem in Washington, DC. The big spender is the welfare state.