George W. Bush and the Return to Deficit Finance

The change in aggregate budget behavior in the 1990s: a cointegration-error correction model analysis

“…There is also evidence of a significant structural break in this relationship that led to deficit reduction and surpluses from 1996 to 2001, the only period during the full sample when a Democratic administration and Republican Congress were in power at the same time. However, given the unique events contributing to this temporary break and the finding that weak deficit sustainability is the norm, the results are consistent with Shughart's (2004) conclusion that a deficit bias is an institutional shortcoming inherent in representative democracy. In this case, his policy suggestion is that constitutional rules such as limiting revenue and expenditure growth to the rate of GDP growth are needed to avoid the expanding deficits currently projected.…”

“…The estimates of β become measures of long-run elasticities. 2 Shughart (2004) and Joyce (2005) identified two factors that produced the transition to budget surpluses in the 1990s: revenue increases that exceeded smaller increases in transfer spending due to strong economic growth and slower growth (or declines) in defense spending. In addition, for the only time during the sample period, fiscal year budget outcomes from 1996 (formulated during 1995) to 2001 (formulated during 2000) were determined by a Congress in which both Houses were under Republican control and the executive branch was under Democratic control.…”

“…In sum, strong economic growth, the absence of a pressing international threat, and political behavior that did not provide voters with new benefits in excess of revenue increases led to a break from persistent budget deficits and debt burden expansion. 3 From 2002 to 2005, tax cuts resulted in an average annual change in revenues of −0.3%, with an estimated ten year cost of $2 trillion (Shughart 2004). Except for Social Security and interest outlays, every spending category experienced a substantial increase in annual growth compared to the 1996-2001 period.…”

“…3 As pointed out byShughart (2004) andJoyce (2005), spending restraint did not extend to all areas of the budget. Growth in non-defense, discretionary spending did not slow after 1995.…”

Public choice in the new century

“…The era of Ronald Reagan and Margaret Thatcher seemingly has been consigned to the dustbin of history. New domestic spending initiatives to provide prescription drug benefits for senior citizens, to "leave no child behind" in the public schools, and to strengthen homeland security against the threat of terrorism have, under an ostensibly "conservative" Republican president, triggered rates of governmental growth in the United States not seen since Franklin Delano Roosevelt's New Deal (Shughart, 2004).…”