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Unsustainable Debt, Unsustainable Gridlock

Unsustainable Debt, Unsustainable Gridlock

By Sean Trende - December 9, 2011

This article formed the basis of a Dec. 8, 2011, presentation at the Mortimer Caplan Conference on the World Economy, held in Washington, D.C.

The current budget impasse has disheartened political observers and further eroded public confidence in America's governing institutions. In the latest RCP Average, only 12.3 percent of Americans approve of the job Congress is doing. This may well be the most unpopular legislative body since Oliver Cromwell’s Long Parliament.

Who can blame Americans, though? While the economy remains moribund, Congress has proved itself spectacularly unable to govern. In part, this is because the 2006 and 2008 elections served to wipe out moderate Republicans, while the 2010 elections did the same to moderate Democrats. Under these circumstances, it is increasingly difficult for the parties to find common ground.

But it isn’t just the polarization of the parties that is driving the current impasse. Both the current gridlock and the polarization are to some degree symptoms of a larger disease: the elimination of what we might call Congress’ “GDP Dividend.”

Consider the following three observations:

First, from the beginning of Dwight Eisenhower’s first term in 1953, through the beginning of this recession in 2007, federal government spending has averaged 20 percent of GDP. The fluctuations came in a fairly narrow band as well: only one year -- 1965 -- falls more than two standard deviations from that value. In other words, federal government spending was almost always between 17 and 23 percent of GDP.

This is remarkable, when you consider what we added to government during this time. An interstate highway system, two massive expansions of Social Security, the beginnings of federal aid to education, Medicare, Medicaid, food stamps, Head Start, volunteer programs, SCHIP (the State Children’s Health Insurance Program), No Child Left Behind, and the Medicare Prescription Drug Benefit. We fought hot wars in Vietnam, twice in the Persian Gulf, in Afghanistan, as well as a cold war that lasted for 40 of those years.

The bottom line is that in 2007, the federal government actually spent a smaller share of GDP than it did in 1952, while doing much, much more.

Second, during this time period, we reduced the top tax rate from 92 percent to 35 percent, and the bottom rate from 22 percent to 10 percent.

Third, we did this while our budget deficits remained relatively stable. On average, our deficits were about 2 percent of GDP. Again, there are only a few outlying years: the mid-’80s and early ’90s on the deficit side; the 1950s and late ’90s on the surplus side.

To tie these three observations together, in 2007, the budget deficit was 1.2 percent of GDP. This is half the size of the deficit from the final Jimmy Carter year and was possible despite, in the interim, taking the top tax rate from 70 percent to 35 percent, raising federal aid to education, increasing spending on homeland security, and enacting a substantial expansion of a major entitlement program.

What made this possible was the “GDP Dividend.” From 1953 through 2007, there were only 10 quarters (out of 220) where per capita GDP was less than it had been three years earlier -- clustered in the late 1950s and 1980s. And when GDP fell beneath the overall trend line, there was usually a spurt in growth that brought us back to the trend line.

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Sean Trende is senior elections analyst for RealClearPolitics. He is a co-author of the 2014 Almanac of American Politics and author of The Lost Majority. He can be reached at strende@realclearpolitics.com. Follow him on Twitter @SeanTrende.

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