Henderson on the 1990s Budget Cuts
By David Henderson
My latest Mercatus study, “U.S. Federal Budget Restraint in the 1990s: A Success Story,” was published last week. In it, I detail how, in a bipartisan way, Congress and the President cut government spending substantially as a percent of GDP in the 1990s.
This follows on my earlier work for Mercatus on how the Canadian government cut government spending as a percent of GDP from the mid-1990s to the mid-2000s and my work on how Congress and President Truman cut government spending as a percent of GDP after World War II.
In 1990, government spending on programs and interest on the federal debt was 21.9 percent of GDP. By 2000, as figure 1 shows, it had fallen to 18.2 percent of GDP, a reduction of 3.6 percentage points. That amounts to a substantial 17 percent reduction in the share of GDP spent by the federal government. While this is a more modest reduction than that achieved by the Canadian government, a one-sixth reduction in the government’s share of GDP is economically significant.
What about the idea that the reason this fraction fell is that the numerator, GDP, grew so much more in the 1990s than in other decades? Wrong. I wrote:
So far I have not focused on the denominator, that is, GDP. I do so now. The period from 1990 to 2000, even though it included a small recession that began in 1990, was one of substantial growth. Between 1990 and 2000, real GDP grew from $6.708 trillion to $9.191 trillion. That amounts to an annual average growth rate of 3.2 percent. That is a quite healthy growth rate for an economy that is not catching up to the rest of the world.
But it is not spectacular growth. To put that growth rate in perspective, the average growth rate of real GDP between 1959 and 1990 was actually higher, at 3.5 percent. The growth rate between 1980 and 1990 was also 3.2 percent. And even the growth rate from 1970 to 1980, not generally thought of as a high-growth decade, was the same 3.2 percent achieved in the 1990s.