Treasury Secretary Geithner speaks this afternoon at the liberal Center for American Progress. His staff have released two quotes to the press:

Secretary Geithner: Ultimately, fiscal policy is about getting the conditions right for economic growth, prosperity, and job creation. Over the past two decades, Washington ran an experiment on that front. In the 1990s, the government put an end to budget deficits, and America enjoyed a period of growth led by the private sector where prosperity was widely shared and job creation was robust. Over the next decade, Washington tried a new path, running up huge debts, while incomes for most Americans stagnated and job creation was anemic. We are living today with the damage that misguided policy caused.

So, as we look to a new decade, there’s some empirical evidence around what works and what doesn’t. Rather than creating a false prosperity fueled by debt and passing the bills on to the next generation, we need to restore America to a pro-growth tax and fiscal policy, where the middle class once again has a chance to prosper.

Secretary Geithner: Borrowing to finance tax cuts for the top two percent would be a $700 billion fiscal mistake. It’s not the prescription the economy needs right now, and the country can’t afford it.

It’s disappointing to see this from Secretary Geithner, whom I see as the least partisan member of the Obama economic team. Tradition suggests I should respond by engaging on the other side of the Secretary’s partisan comparison. This is not, however, a debate between two economic philosophies, but instead a debate among three: Clinton, Bush, and Obama. The Secretary makes an important mistake by suggesting that the Obama Administration is returning to the fiscal policies of the Clinton Administration.

In addition, Obama v. Bush debates are almost always colored by a heavy partisan tinge, so let’s see if we can learn anything by comparing Clinton to Obama on both fiscal policy and economic results.

Leaving out the Bush comparison, the Secretary’s logic follows three steps:

1. the strong economic numbers during the Clinton Administration are a result of the fiscal policies of the Clinton Administration;
2. the Obama policies are a return to the Clinton policies; and therefore
3. the Obama policies will once again produce a strong economy like we saw in the 90s.

I disagree with (1) but today I want to focus on (2) and (3). I believe the following data will disprove both claims using the Obama Administration’s own numbers.

Here are the Clinton actuals vs. projections for the Obama tenure as projected by the Obama Administration.

That’s a lot of numbers. Here are my data and sources. Since a two-term Presidency affects nine fiscal years rather than eight, that’s how I’m calculating the averages. For an explanation of this logic see this post. If you think my logic is bad, you can see the calculations for eight-year averages in my backup spreadsheet. You’ll see that the conclusions don’t change, and in most cases my preferred methodology actually makes President Obama’s numbers look slightly better.

Let’s turn these numbers into graphs, starting with the fiscal policies. Is President Obama proposing a return to the Clinton fiscal policies? Not on spending:

Team Obama projects that, if President Obama’s policies were implemented as he proposes them, average federal spending would be a dramatically larger share of the economy than it was under President Clinton.

Some will argue that President Obama’s average is unfairly high because he had to cope with a severe recession, while President Clinton faced a benign economic environment throughout his tenure. But spending in a hypothetical Obama second term, long past the financial crisis of 2008, would still be 16% higher as share of the economy than Clinton’s average. (22.7 -19.6) / 19.6 = 15.8%

Based on this graph I don’t see how Secretary Geithner can suggest that President Obama is returning to the fiscal policies of the 1990s.

As much as I’m trying to make this not about the Bush tenure, some smart reader is saying to himself, “Yes, but Obama has to pay interest on the debt accumulated during the Bush Administration.” So let’s remove interest payments from both Clinton and Obama’s spending and compare them.

All columns are lower, but the comparison looks the same. President Obama would have a federal government more than four percentage points larger than President Clinton had, measured as a share of the economy. If President Obama has only one term it would be 5.4 percentage points larger. The higher Obama spending cannot be blamed on the additional debt he inherited from policies implemented during the Bush Administration.

Now let’s look at deficits.

President Clinton averaged a surplus over his tenure. Using President Obama’s own projections of his policies, the budget deficit would average 7.8% of GDP over a first term, and 6% of GDP over two terms if he were reelected. Once again, it is absurd for Secretary Geithner to suggest that President Obama is returning to the Clinton fiscal policies.

Once again, I’ll remove interest payments and recalculate the deficits to show that the difference between Clinton and Obama deficits is not the fault of inherited debt:

I hope these graphs disprove the Secretary’s implication that, by supporting a tax increase effective January 1, President Obama is somehow returning to the Clinton Administration’s fiscal policies. If anything, leaving out interest payments makes Obama’s fiscal policies look relatively worse.

Now let’s examine two measures of results, the unemployment rate and the growth rate of real GDP.

Team Obama projects that the President’s policies would result in 9 percent average unemployment over the President’s first term, and 7.6 percent average unemployment over two terms. Compare that to the 5.2% average unemployment rate during the Clinton Administration. Even in a hypothetical second term, after the financial shock is more than four years behind us, the Obama team estimates unemployment would average more than six percent in a second Obama term, worse than the average over the entire Clinton presidency.

And how about real economic growth?

This graph depresses me. The Secretary’s op-ed yesterday was titled “Welcome to the Recovery,” yet he and his colleagues project an average of only 1.4% real GDP growth over a two-term Presidency.

The good news is that everyone (and I do mean everyone) is just making wild guesses about GDP growth and the unemployment rate beyond one year in the future. Nobody really has any clue what the economy will look like two, three, or six years from now.

Washington and the press corps gravitate to partisan fights like Bush v. Obama. The Secretary’s remarks today feed that tendency. I believe the claims of the Clinton team that their policies caused the strong economic growth are exaggerations, and some other time I will engage in that debate. For today what’s most important is that the Obama fiscal policies are vastly different than those of the Clinton Administration, and the Administration’s own estimates project economic results far worse than we saw in the 90s.

I agree with Secretary Geithner Secretary that we need to restore America to a pro-growth tax and fiscal policy. I just don’t think that government spending of 24% of GDP, budget deficits averaging 6% of GDP, and raising taxes on successful small business owners during a weak recovery are that policy.

Irresponsible Billy Jones is once again spending more than his allowance. He is running up huge bills on the credit card his parents gave him. His parents cut his allowance nine and then again seven years ago and now Billy’s sister Suzy is debating some family friends whether a scheduled automatic increase in Billy’s allowance should be allowed to take effect January 1.

Self-anointed Wise Family Friends David, Fareed, and even Alan all argue that Billy’s parents should increase his allowance as planned. “Billy’s credit card debt is too big and it’s only going to get bigger,” they argue. “The responsible move is to increase Billy’s allowance as planned, and for Billy to use that higher allowance to reduce his monthly credit card borrowing. Eventually he needs to cut back on his spending as well, but this is a responsible first step.”

Eight-year old Suzy shakes her head because she’s heard this many times before. “Give Billy more money and he should use it to pay down his credit card,” she says. “But just look at what he’s done since January of last year. He has massively increased his spending to levels this family has never seen before. Sometimes he demands (and gets) more moneyfrom Mom and Dad to pay for his new spending. He has the gall to call that responsible since he’s not running up more credit card debt. He forgets that every dollar he takes from Mom and Dad is a dollar they cannot spend on the rest of the family’s needs.”

“For example, look at the new lifetime subscription he got to this new online game called ‘Universal Health Care.’ Sure he cut back on his monthly purchases of comic books to cover some of the costs, but he also demanded and received a big permanent allowance increase. Now that family money is committed to pay for his new subscription, and if he’s ever going to pay down his credit card balances, he’s going to have to cut other spending or, far more likely, demand an even bigger allowance increase from Mom and Dad. Once again, the rest of the family will lose out as we sacrifice resources to finance Billy’s unrestrained spending.”

Suzy continues, “Then there was the lemonade stand. ‘I’m going to borrow $787 on my credit card to build a super duper lemonade stand,’ Billy told Mom and Dad. ‘It will be such a success that not only will I make more money, but the whole family will benefit.’ We all know how that turned out, although Billy still claims it was exactly as successful as he had predicted, and that nobody had anticipated a cold summer would suppress demand for lemonade. Where is global warming when you need it?”

“Sometimes Billy spends and puts it on his credit card. When he does this he says it’s an emergency, even though everybody saw it coming months in advance. Or he calls it stimulus that will benefit the rest of the family, although I’m not sure his lemonade stand really needed a built-in stereo system.”

“Other times Billy spends and takes more allowance money from the rest of the family. When he does this he argues he is being responsible because he’s not running up more credit card debt. He calls it ‘paygo,’ which is a dumb name but I see what he’s trying to do. I am glad he’s not borrowing to pay for this new spending, but the dollars he takes from the rest of the family have real consequences for Mom, Dad, and me. We are worse off when Billy gets a bigger allowance.

Suzy continues, “Even scarier than Billy’s recent spending binges are the long-term spending commitments he has made. Billy has promised his many friends he would drive them wherever they want when he turns 16 next year, but we all know he won’t have enough money to pay for gas. He also told a bunch of girls that, once he gets his car, he will take them on dates to really expensive restaurants, and we know he doesn’t have that in his budget. Billy’s friends are getting excited about all these promises he’s been making for several years, which are coming due soon.”

“Billy should talk to his friends and tell them he’s going to have to scale back on those promises. He can drive his friends who won’t have a car, but those with cars of their own will have to drive themselves most of the time. And I’m all for Billy dating, but he needs to look for less expensive places to go. This family needs to rethink whether it can afford a lifetime subscription to Universal Health Care when we can’t pay for other needs. And Billy’s unrestrained spending binges have to stop. Billy needs to scale his spending way back. When he does so the explosion of credit card debt will stop, and the rest of the family will stop getting their needs shortchanged.

“Billy has historically taken about 18% of this family’s income for his spending, and he has typically run another 2% on his credit card each year. Now his annual spending has jumped from 20% of our family’s income to about 25%. Once we get out of this recession his allowance will automatically climb to an unprecdented share of family income, and Billy wants more. I’d like to start a small business designing apps for the iPhone, but I don’t think I can afford the startup costs if Mom and Dad give Billy even more money next year.”

“You’re only eight so you’re not Wise like us,” say the Wise Family Friends. “We must do something about Billy’s credit card debt.

Suzy responds, “Billy’s credit card bills scare me, too, but they’re the symptom, not the disease. The underlying problem is not Billy’s borrowing, it’s his out-of-control spending. You so-called Wise People miss three points. One is that you forget that increasing Billy’s allowance imposes costs on the rest of the family. Two is that Billy shows every sign that he will spend any allowance increase you give him, if not immediately, then soon thereafter. Third and most importantly, as long as his spending continues to grow at an unsustainable rate, you’re asking the rest of the family to make permanent sacrifices that at best will result in only temporary reductions in his credit card debt.”

The Wise Family Friends jump back in. “We all agree that Billy needs to cut his spending. We also agree that he will have to scale back the future promises he has made to his friends. Suzy, you may have to agree that Billy gets a bigger future allowance which means you and your parents will have less for your own needs. Living in a family is about making compromises. We will soon sit down and have a firm conversation with Billy about his spending. We will then see what we can get him to agree to as a combination of slower future spending growth and a bigger allowance.”

Flabbergasted, Suzy says, “And yet you want me to agree that Billy deserves a bigger allowance January 1st, before he has agreed to do anything about either his current spending binge or his unsustainable future spending promises? You say he needs the bigger allowance to pay off his credit card debt. You say he needs the bigger allowance in part to address those unfunded future promises.”

“Let’s look at the best case scenario. Suppose Billy takes that bigger allowance and uses it to not run up quite so much new credit card debt each month. The amounts he spends now are paltry compared to those future driving and dating promises. Billy turns 16 next year. What’s to prevent him from running his credit card debt right back up again on gasoline and expensive dates? By my calculations, if Billy gets a permanent allowance increase on January 1 and if he uses it to reduce his monthly credit card bills, in less than two years those new spending promises will drive his credit card debt right back to where it is now. The rest of the family will have fewer resources forever, Billy’s credit card debt will once again be too high, and his spending will still be growing faster than this family can support. You’ll probably come back to me at that point and explain that once again Billy need a bigger allowance. Who decided you were Wise anyway?”

“Trust us, you irresponsible little girl,” say the Wise Family Friends. “Take more money from the rest of the family and give it to Billy now. Unlike every prior allowance increase over the past 18 months, we hope he will save this one. And then in the future maybe we’ll get the whole family to sit down and debate how much more Billy’s allowance should increase, and how much we can convince him to scale back his promises to his friends.”

“That’s what scares me,” replies Suzy.

(photo credit: Greed by Muffet)

Concerned about both the weak economy and its political consequences for the Administration, the President and his advisors would like to enact more fiscal stimulus. Yet they know they cannot get the votes to increase spending. Congressional Republicans are unified against deficit-increasing spending for any goal. Enough Congressional Democrats have joined them that the President’s first choice is impossible. The supposed policy positions look like this.

Do you support fiscal stimulus?

The intellectually pure fiscal stimulus positions are boxes 1 and 4.

The President and most Congressional Democrats are in box 3. They support fiscal stimulus but only in the form of increases in government spending. We saw this when the House recently passed a bill in which Blue Dogs insisted that any tax cuts be offset by other tax increases, but were quite comfortable using a fiscal stimulus argument to justify increased government spending that increased the deficit.

While Congressional Republicans claim they are in box 4, I believe most of them would actually be in box 2 if presented with the opportunity. They would be happy to support short-term fiscal stimulus if it were implemented in the form of tax cuts, and they are using anti-fiscal stimulus arguments as a way to argue against the only stimulus likely to be enacted, through increased government spending.

While the Administration and its allies try to enact spending increases, under current law taxes are scheduled to increase effective January 1 of next year:

• the individual income tax rates will increase from 10/15/25/28/33/35 to 15/28/31/36/39.6;
• the per-child tax credit will decrease from $1,000 to $500;
• capital gains tax rates will increase from 5/15 to 10/20;
• dividends will be taxed as ordinary income, rather than at 5/15 percent rates; and
• the estate tax will return to life, with a $1 million exemption and a 60 percent top rate.

CBO estimates these tax increases will increase federal revenues and reduce the budget deficit by about $170 B in 2011. If you are a big believer in fiscal stimulus that is a huge contraction. That amount is bigger than the deficit increase in that year resulting from the President’s Feb 2009 stimulus law.

The President and his Congressional allies propose to allow only the “taxes on the rich” to increase. From the above list they would allow the 33% and 35% individual income tax rates to increase to 36% and 39.6%. They would allow the capital gains and dividends tax rates to increase and maybe create a tiered structure so that higher rates apply only to those with higher incomes. And they would allow the estate tax to return, albeit with a larger exemption and a lower rate. These are longstanding Presidential commitments and now qualify as Democratic party dogma.

They are also anti-stimulus. A better word might be “contractionary.” The Administration says their policies would raise taxes on the rich and reduce deficits by about $45 B in 2011. That is almost 50% larger than the deficit effect of the pending proposal to extend unemployment insurance benefits.

While these tax increases would reduce the deficit, they have negative economic effects as well:

• Any tax increase leaves less money in the hands of private individuals and firms to do with as they see fit.
• The top marginal income tax rates apply not just to rich individuals and families but also to successful small businesses. The President and his allies are proposing higher taxes on small businesses in a weak economic recovery. That is bad policy and terrible politics.
• Uncertainty about future tax rate increases is a factor in firms hoarding cash. We need firms to hire workers and increase investment.
• Lowering the dividend tax rate in 2003 reduced the tax incentive for corporations to hoard cash. Dividend payouts increased. Allowing dividend tax rates to increase will encourage corporations to hoard even more cash than they are now.

The President could trap Republicans in their own anti-fiscal stimulus rhetoric by proposing to extend all the Bush tax cuts for, say, two years along with extending unemployment insurance. I believe Congressional Republicans would quickly shift from box 4 to box 2 above. Both Congressional parties would be exposed for their intellectual inconsistency on fiscal stimulus while they enacted a bipartisan law.

Let’s look at the benefits of this:

• If you’re a believer in fiscal stimulus, then this is additional stimulus that you can enact now. It’s not big, but when combined with an extension of unemployment insurance it’s almost $80 B over the next year. That is still only about half a percent of GDP, but it’s the best they can get out of this Congress, and the tax cuts would have an effect immediately as uncertainty is eliminated and expectations change.
• This policy would help small businesses and eliminate tax uncertainty for all businesses for two years.
• Keeping the dividends rate low would eliminate the added incentive for corporations to hoard cash that will occur next year if the President’s policy is enacted.
• The President could demonstrate that he can be bipartisan.
• By enacting it for two years he can once again tee up “tax cuts for the rich” as a political issue in election year 2012.

This would create the same legislative coalition that enacted the 2008 stimulus negotiated by Speaker Pelosi, Leader Boehner, and then-Secretary Hank Paulson after President Bush proposed it. With Presidential leadership such a coalition could be rebuilt today.

The idea is not without costs for the President:

• Spending-side stimulus advocates will correctly point out that some of the tax relief would be saved rather than spent. They will forget to mention that the stimulative bang from tax relief will occur immediately, while government spending has its effect slowly.
• The President would have to temporarily reverse himself on a core element of his economic policy. It would also undercut his “blame Bush” message.
• Even when combined with an extension of unemployment insurance benefits, the stimulative bang is smaller than someone like Dr. Krugman would argue is needed.
• This move would split Congressional Democrats, many of whom could not imagine voting either for the policy or to extend President Bush’s legacy.
• It would similarly anger many in the Democratic political base, upon whom Congressional Democrats are depending to prevent a rout this November.

For the above reasons this idea won’t happen, but I think it is a useful thought experiment to illuminate the intellectual inconsistency on both sides of the fiscal stimulus debate. On this I agree with Megan McArdle:

Wading through the online debates, I note that opinions on stimulus are nearly 100% correlated with the composition of that stimulus, and the opinionator’s prior view of that activity. So when Democrats are in power and stimulus is mostly spending, liberals think that the stimulus is an issue of fierce moral urgency stymied by venal greed and rank idiocy, while conservatives develop deep qualms about budget deficits. When Republicans are in power, and stimulus consists mostly of tax cuts, Democrats get all vaporish about deficits and the income deficit, while Republicans suddenly realize that the normal rules don’t apply in an emergency. When out of power, both sides will grudgingly concede that some small amount of highly temporary stimulus might be all right, but note (correctly) that the other side seems to be trying to make permanent as much of this “stimulus” as possible.

For me, then, this mostly ends up as a proxy war over the level of government spending, a war I’d rather fight honestly on value grounds rather than attempting to disguise my preferences with a shoddy veneer of “scientific” logic.

As President Obama ramps up his partisan campaign blame rhetoric, remember that he is choosing not to pursue this bipartisan option that would enact more fiscal stimulus and extend unemployment insurance benefits while preventing tax increases on small business owners during a too-slow economic recovery.

(photo credit: fazen)