Obama Second Term: Expect More Government Spending, Less Economic Growth

On October 3 President Obama’s campaign issued a press release claiming Mitt Romney wants to return to the same “failed policies” that “crashed the economy.” What policies are those? The release makes reference to tax cuts and defense spending.

Obama actually extended the Bush tax cuts for everyone in late 2010. He has also proposed extending those rates for all but those making more than $250,000 in 2013. Putting aside the fact that Obama has essentially endorsed the Bush tax cuts, I don’t think any reasonable economist would argue that tax cuts, much less defense spending, “crashed the economy.” While both contributed to deficit spending, neither played a role in causing the economic collapse. In reality, the housing collapse was the driving factor in causing the recession, and both parties played significant roles in creating that mess.

Upon closer review, Obama is the one doubling down on the failed policies of the past. His answer to every problem is more government spending; or as we call it now, “investment.” We’ve been doing plenty of “investing” over the past 12 years. Under George W. Bush, government spending rose 83%, with increases across the board.

Even when controlling for spending on defense and interest, Bush grew the federal government 5.4% per year. This was the highest rate of increase in domestic discretionary and entitlement spending since Nixon left office. Meanwhile, under Clinton, spending increased just 1.5% annually. When he was elected in 1992, government spending was 22.1% of GDP. By the time he left office in 2001, spending was down to 18.2%. Progressives are quick to point out that the economy boomed under Clinton despite higher marginal tax rates, but ignore the fact that government spending as a percentage of GDP was slashed 18%.

History tells us that more government spending is not the path to prosperity. Proponents of government spending often point to the New Deal as the model of success. In school, we were taught that Herbert Hoover’s austerity measures turned the stock market crash of 1929 into the Great Depression. Nothing could be further from the truth. Under Hoover, non-defense federal spending increased by 259% from 1929 to 1933. He started huge infrastructure projects and raised taxes on high earners. Even Franklin D. Roosevelt described Hoover’s spending as “extravagant and reckless” when campaigning for the presidency.

Despite the campaign rhetoric, FDR simply expanded the government spending, tax hikes and control over the economy. As a result, we had the longest period of economic misery in the history of our nation. In 1939, FDR’s own Secretary of Treasury, Henry Morganthau, said, “We have tried spending money. We are spending more than we have ever spent before and it does not work. ... after eight years of this Administration we have just as much unemployment as when we started. ... And an enormous debt to boot!” Unemployment remained above 17% in 1939. Many FDR apologists argue the economy took another dip in 1937 because the administration cut spending. However, data shows spending only fell $600 million from 1936 to 1937; less than one percent of the nation’s GDP.

Since the economy slowed in 2008, we’ve had stimulus bills signed by both Bush and Obama, TARP, auto bailouts, cash for clunkers, and quantitative easing. What do we have to show for it? Nearly 15% of the population remains underemployed, GDP growth has fallen to an anemic 1.3%, and we are adding more than a trillion dollars to the national debt year after year. What does Obama propose to do in a second term? Increase spending on everything but defense and raise taxes on higher earners. 

Herbert Hoover would be proud.