The Daily Hatch

Good News: We’re Heading in the Wrong Direction at a Slower Pace

March 25, 2013 by Dan Mitchell

In recent months, people have asked me why I’m acting all giddy and optimistic. Am I hooked on cocaine? Have I fallen in love? Did I inherit several million dollars?

These questions started after I said the fiscal cliff was a smaller loss than I expected. Then people wondered what was going on when I wrote that we should celebrate the sequester victory. The questions got more intense when I opined that the Tea Party had made a positive difference. And people were even more nonplussed when I wrote that we should enjoy a win over the IMF.

But I’m not the only person thinking that things may be heading in the right direction.

Conn Carroll explains his optimism in the Washington Examiner. He starts by noting how bad Congress was back in 2009 and 2010.

…its liberal predecessor passed a trillion-dollar stimulus, enacted a government takeover of health care and institutionalized the power of Wall Street’s Too Big To Fail banks by passing the Dodd-Frank financial regulation law.

Then he explains that the new Tea Party Congress has changed the fiscal outlook.

…if you look at the hard numbers — if you look at the tax-and-spending trajectory that the United States was on before the 112th Congress was sworn into office, and then look at the path the U.S. is on now — you’d see that Republicans in Congress have made tremendous progress in shrinking the size and scope of the federal government.

But is there any proof?

Conn points out that the CBO “baselines” from early 2011 showed government growing very rapidly.

…the nonpartisan Congressional Budget Office released its annual Budget and Economic Outlook for fiscal years 2011 through 2021. That document showed the federal government was on track to spend…a total of almost $50 trillion ($49.8 trillion to be exact) through 2021. At the same time, tax revenues were set to rise from just 14.8 percent of GDP in 2011 to 20.8 percent in 2021.

The same estimates from early this year, by contrast, show government growing at a slower pace.

The CBO’s Budget and Economic Outlook for fiscal years 2013 through 2023 shows just how much House Republicans have actually accomplished. The federal government is now on track to spend just $46.2 trillion through 2021. That is a $3.6 trillion spending cut. And instead of taxes eating up 21 percent of the U.S. economy in 2021, now the government is set to take in just 18.9 percent.

Here are the respective baselines from those CBO publications. Let’s start by looking at how spending is projected to grow at a slower pace for the rest of the decade.

That’s $3.5 trillion of savings. Not genuine spending cuts, of course, but it’s real progress if government doesn’t grow as fast.

Here are the revenue numbers.

This data basically shows that the tax burden will be much smaller than projected because about 98 percent of the Bush tax cuts were made permanent as part of the fiscal cliff deal.

And if you believe in the Starve-the-Beast theory (and you should), this will make it harder for politicians to increase the burden of government spending in the future.

Conn also notes that the unemployment rate has fallen.

Despite all of this supposedly economy-killing “austerity,” unemployment has steadily fallen, too. When Republicans took control of the House in 2011, the nation’s unemployment rate was 9 percent. Today, it has fallen to 7.7 percent.

If this seems like a familiar point, it’s because I share his assessment. I wrote back in February of last year that gridlock was a positive thing for the economy since it reduced the likelihood of new bad policies.

What’s remarkable about these developments, as Conn notes, is that folks were expecting Obama to have momentum as his second term began.

Just three months ago, many in Washington were predicting Obama would steamroll Republicans into accepting higher taxes for millions of earners, undoing the sequester and maybe even passing new stimulus spending. Instead, Republicans have stayed unified, outfoxed Obama, preserved and made permanent most of last decade’s tax cuts (including permanent indexing of the Alternative Minimum Tax) and let the sequester cuts occur on schedule. As a result, Obama’s approval ratings have tumbled, and his entire second-term agenda is in jeopardy.

The final sentence in that excerpt explains why I’m feeling semi-optimistic. Obama’s agenda of more taxes and more spending is being thwarted.

To be sure, that doesn’t mean we’re seeing good policies of tax reform and fiscal restraint. And we still face a very dour fiscal future unless entitlements are reformed.

But we’re going in the wrong direction at a slower pace, and that beats the alternative.

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