BRINNER117.pptU.S. Fiscal Policy in the 1990sLecture 18BRINNER217.pptFEDERAL BUDGET HISTORY•Taxes have trended up largely to pay for greater entitlements (transfers)•Taxes less transfers were reduced in the 1970s to prepare for baby-boom retirement•The Carter (77-80) and Clinton (92-00) terms saw increased taxes to reduce inherited deficitsFEDERAL TAXES (NIA BASIS) 0%5%10%15%20%25%19471950195319561959196219651968197119741977198019831986198919921995199820012004% OF GDPTOTAL TAXES TOTAL TAXES - TRANSFERS PERSONAL TAXES TRANSFERSBRINNER317.pptFEDERAL BUDGET HISTORY•Under Reagan, spending rose to a peak of 25%•Military spending surged •The huge deficits raised interest payments•Other categories were cut•Military spending is now below pre-WWII %’s•Transfers have surged•Other categories rose in the 1960sFEDERAL SPENDING (NIA BASIS)0%5%10%15%20%25%30%19471949195119531955195719591961196319651967196919711973197519771979198119831985198719891991199319951997199920012% oF GDPINTEREST MILITARY TRANSFERS OTHER TOTALBRINNER417.pptFEDERAL BUDGET HISTORY•Note the similar efforts to close the deficit underCarter and under Clinton, by raising taxes and cutting spending•Note how unusual a surplus is•The Federal budget tended to absorb 20% of GDP, with a clear upward trendFEDERAL BUDGET-10%-5%0%5%10%15%20%25%30%19471950195319561959196219651968197119741977198019831986198919921995199820012004% OF GDPDEFICIT (UNI) TOTAL TAXES (UNI) TOTAL SPENDING (UNI)BRINNER517.pptFEDERAL BUDGET HISTORY•Taxes have trended up largely to pay for greater entitlements (transfers)•Taxes less transfers were reduced in the 1970s to prepare for baby-boom retirement•The Carter (77-80) and Clinton (92-00) terms saw increased taxes to reduce inherited deficitsFEDERAL TAXES (NIA BASIS) 0%5%10%15%20%25%1980198219841986198819901992199419961998200020022004% OF GDPTOTAL TAXES TOTAL TAXES - TRANSFERS PERSONAL TAXES TRANSFERSBRINNER617.pptFEDERAL BUDGET HISTORY•Under Reagan, spending rose to a peak of 25%•Military spending surged •The huge deficits raised interest payments•Other categories were cut•Military spending is now below pre-WWII %’s•Transfers have surged•Other categories rose in the 1960sFEDERAL SPENDING (NIA BASIS)0%5%10%15%20%25%30%1980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004% oF GDPINT EREST MILIT ARY TRANSFERS OTHER TOTALBRINNER717.pptFEDERAL BUDGET HISTORY•Note the similar efforts to close the deficit underCarter and under Clinton, by raising taxes and cutting spending•Note how unusual a surplus is•The Federal budget tended to absorb 20% of GDP, with a clear upward trendFEDERAL BUDGET-10%-5%0%5%10%15%20%25%30%1980198219841986198819901992199419961998200020022004% OF GDPDEFICIT (UNI) TOTAL TAXES (UNI) TOTAL SPENDING (UNI)BRINNER817.pptU.S. Fiscal Policy in the 1990s After a decade of extreme deficit spending, all three presidential candidates in 1992 promised to move toward a balanced budget in five years– Ross Perot promised a blend of tax increases and budget cuts– George Bush offered spending cuts but, under pressure from the Republican Party, promised new tax cuts– Bill Clinton promised higher taxes and spending cuts in existing programs, but added new spending on education and infrastructure, thereby retaining a deficit Clinton, the victor, proposed his campaign program in 1993 but Congress rejected it, favoring more aggressive action to balance the budget– The Democrats controlled Congress, but yielded to public opinion to reject delays in balancing the budget beyond a 5-year plan In the campaign for the 1994 Congress, the Republicans offered a strict plan they called “The Contract for America”– This promised budget balance, welfare reform, and select new tax incentives– They won control of the House and Senate and implemented the basics of their fiscal strategyBRINNER917.pptU.S. Fiscal Policy in the 1990s During this debate, research groups such as DRI analyzed the impacts– The exhibits that follow were produced in late 1994 and early 1995– They reveal the expected outcomes, presenting the mainstream macro-economics position on this debate– The exceptional boom of the late 1990s met and often exceeded these expectations: – The actual 1995-1998 data and current forecasts through 2002 are added to a few of the slides to precisely compare results with expectationsProspects for the Economy through 2002Slower population growth meansslower labor force growth.Productivity growth will continue to be hurt by inadequate private investment.But,Tax changes could boost labor force participation by second earners and retirees.Welfare reformed to workfare could add over a million productive employees.Gradual achievement of federal budget balance would greatly bolster private investment.Capital gains tax cuts would also boost national growth.BRINNER10902mit17.pptSummary of the Forecast Made in 1994,and the Results as of 1999 ‘82-’94 ‘95-’02Fore ‘95-’98 ActualUnemployment Rate 6.9 5.8 5.1Real GDP Growth (annual) 2.9 2.4 3.4Housing Starts (million) 1.4 1.3 1.5Consumer Price Inflation 3.8 3.4 2.4Productivity Growth 1.3 1.4 1.6Prime Rate 9.4 7.9 8.5BRINNER11902mit17.pptAdult Population Growth Has Fallen to Approximately 1% Per Year01020304050607080901001960 1965 1970 1975 1980 1985 1990 1995 2000 2005Pop Male(20-64) Pop Female(20-64)Pop Retires Pop Teenagerspopulation by age group, millionsBRINNER12902mit17.pptPopulation Growth Rates by Age and Sex 60’s 70’s 80’s 90-94 95-99 2000-05Males (20 to 64) 1.1 1.9 1.4 1.0 0.9 1.0Female (20 to 64) 1.2 1.8 1.2 0.9 1.0 1.0Retirees (above 65) 2.6 2.4 2.0 1.6 0.8 0.9Teenagers (16 to 19) 3.6 1.5 -1.5 -1.1 2.4 0.9Total 1.6 1.9 1.2 0.9 1.0 1.0Average Growth Rates BRINNER13902mit17.pptThe Labor Force Will Also GrowOnly Slightly Faster Than 1% Per Year 00.511.522.53Total LaborForce 60's 70's 80's 90-94 95-99 2000-2005Average Growth Rates HistoryForecastBRINNER14902mit17.pptTeenage and Female ComponentsWill Exhibit the Fastest Growth -1-0.500.511.522.5(average labor force growth rates, 1995-2002)MalesFemalesRetireesTeenagersBRINNER15902mit17.pptThe Labor Force Is Rising at a Similar Pace Because the Big Gain From Women Becoming New Earners Appears Past010203040506070801960 1965 1970 1975 1980 1985 1990 1995 2000 2005Male (20-64) Female (20-64) Retires Teenagers Labor Force by Age-Sex Group, MillionsBRINNER16902mit17.pptParticipation
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