“Cutting just 1 percent of overall federal spending for six consecutive years would balance the federal budget by 2017.”
— Former Minnesota governor Tim Pawlenty (R), June 7, 2011
Tim Pawlenty delivered on Tuesday what was billed a major economic speech, in an apparent effort to burnish his free-market credentials in the race for the GOP presidential nomination.
Speaking at the University of Chicago, the former Minnesota governor called for huge cuts in taxes — no income taxes at all for couples making less than $100,000 and no capital gains, dividend or estate taxes. At the same time, he called for cuts in government spending and a goal of achieving 5 percent growth in the gross domestic product — without providing many specifics of his policies to achieve this objective.
We will leave to others whether this is good economic policy, but we are interested in making sure the numbers add up or his facts are accurate. On that score, it is a less-than-stellar performance.
Let’s look at Pawlenty’s claims in the order he made them.
“Our health care system — thanks to Obamacare — is more expensive. And less efficient.”
The health care law does not take full effect until 2014, and yet Pawlenty is already blaming it for higher costs? There’s certainly debate about how effective the law will be in reducing costs, but this is really putting the cart before the horse. The administration has not even gotten doctors and hospitals to agree to its draft regulations for getting quality health care at less cost.
The Pawlenty campaign cited a recent report on medical cost trends by PricewaterhouseCoopers as support for this statement, since it shows health care costs and premiums are continuing to rise. However, the report does not blame the new health care law, saying, “The law will have minimal effect on the cost trend in 2012” because it has not become fully effective.
The PWC report further says: “Health reform is pressuring employers, providers, insurers and drugmakers to be more cost-conscious. They’ll be held more accountable for costs as well as performance while coping with new tax and government payment regulations.”
This report certainly does not help make Pawlenty’s case. (The campaign also cited an interpretation of Congressional Budget Office estimates of the bill’s impact on the future federal budget, but Pawlenty was talking about the impact on health costs today.)
“Five percent economic growth over 10 years would generate $3.8 trillion in new tax revenues. With that, we would reduce projected deficits by 40 percent. All before we made a single budget cut.”
Pawlenty’s goal of 5 percent annual growth in the gross domestic product strikes us as rather ambitious. He essentially admits this when he notes that Ronald Reagan achieved 4.9 percent growth between 1983 and 1987 and that Bill Clinton achieved 4.7 percent growth between 1996 and 1999. Both of those results came after recessions. Pawlenty, who proposes dramatic cuts in taxes, does not note that Clinton’s stellar economic performance was achieved even though he raised taxes on the wealthy.
Pawlenty also makes 5 percent growth seem achievable by lumping together the best years. When the individual years during each man’s presidency are examined, this goal seems even less realistic.
Reagan’s GDP growth per year: –2.0%, 4.3%, 7.3%, 3.8%, 3.4%, 3.4%, 4.2% and 3.5% (average of 3.5 percent).
Clinton’s GDP growth per year: 4.0%, 2.7%, 3.6%, 4.4%, 4.2%, 4.9%, 3.8% and 0.3% (average of 3.5 percent).
Indeed, when Bob Dole ran for president as the Republican nominee in 1996, he had a more modest goal than does Pawlenty: “Bob Dole believes the economy can grow at an annual rate of 3.5 percent. And he will implement a plan to achieve this goal.”
The last president to achieve consistent growth above 5 percent was John F. Kennedy a half-century ago, when the baby-boom generation was on the verge of entering the workforce. Now, that generation is heading into retirement, leaving fewer workers to carry the burden.
Simply on the basis of economics, Dole had what seems like a reasonable objective — and Pawlenty is close to not passing a laugh test, especially if he also proposes to slash the federal budget and taxes.
The Pawlenty campaign says that he assumes federal revenue will return to its historic average of around 18 percent of GDP, even with his lower rates and elimination of key taxes, because “this has generally been the case regardless of higher or lower revenues. With lower rates, we will have a higher rate of tax compliance and increased revenue due to increased growth.”
Maybe it is just a coincidence, but after the Reagan and George W. Bush tax cuts, tax receipts as a percentage of GDP dropped well below 18 percent, even as low as 16 percent. (See table 15.1). In 2010, tax revenues were below 15 percent of GDP, so there is a steep hill to climb to get back to 18 percent.
“As one of 49 governors operating with a balanced-budget requirement. I balanced four biennial budgets in my two terms as governor of Minnesota.”
Pawlenty, who left office in January, did not mention that the state now has a multibillion-dollar deficit, the fourth-highest in the nation. According to the Wall Street Journal, critics say the deficit stems ”from short-term funding maneuvers that were used during [Pawlenty’s] tenure to patch over shortfalls — and to put off tough decisions to align Minnesota’s tax base with its government spending.”
“As an example, cutting just 1 percent of overall federal spending for six consecutive years would balance the federal budget by 2017.”
This is also a pie-in-the-sky statement. The total federal budget for 2011 is nearly $3.8 trillion, but only about a third ($1.4 trillion) is subject to annual spending bills passed by Congress — and nearly $900 billion of that is devoted to defense and homeland security. The remainder of the budget is devoted to spending on such programs as Social Security, Medicare, and Medicaid.
In a statement, the campaign said: “The proposed idea of cutting 1 percent would be based on a base year and spending would be reduced 1 percent each year from that base year. This produces a compounding effect of cuts due to these proposed cuts and takes into account that spending would also not increase in those years as otherwise projected.”
Pawlenty makes it sound easy — just 1 percent! — but that would amount to at least $38 billion in cuts a year, without allowing for any spending increases due to inflation or population growth.
The projected deficit in 2017 is $890 billion. In other words, Pawlenty is proposing so much deficit reduction that he cannot meet his goal even by eliminating ALL spending on nondefense discretionary programs ($462 billion). The military would need to be decimated, or Social Security or Medicare slashed.
Call us inside-the-Beltway hacks, but it doesn’t seem remotely possible.
“The fact is federal regulations will cost our economy $1.75 trillion this year alone. It’s a hidden tax on every American consumer.”
This old saw again. We had looked into the source of this “$1.75 trillion” statistic a few months ago and had deemed it worthy of two Pinocchios. It is from a study that does not consider the benefits of regulations, only the costs. That is dubious methodology.
“And all we have to show for it is $3.7 trillion more debt. Nearly 2 million fewer jobs. A Congress that hasn’t passed a budget in more than two years.”
Pawlenty’s job figure comes from looking at how many people were employed in January 2009 (142.2 million), when Obama took office, and how many were employed in May 2011 (139.8 million), according to the Bureau of Labor Statistics. That’s a gap of 2.4 million.
We had earlier rapped former Massachusetts governor Mitt Romney for basing a job-loss figure on January 2009, before any of Obama’s economic policies had taken effect. (About 2 million jobs were lost in the first three months of Obama’s presidency, before any of his policies were enacted, so should he get the blame for that?)
But Pawlenty frames it more responsibly than Romney did, and his figure is not totally out of line. In fact, the BLS data helps explain why Obama gets poor reviews for his handling of the economy. From June 2009 to May 2011, there has been virtually no change in the number of Americans holding jobs — it has remained stuck under 140 million.
The Pinocchio Test
In this speech, Pawlenty pushed the envelope to make eliminating the budget deficit and boosting the economy sound much too easy, while relying on some dubious facts and assertions.