POL-Ele-0066-Stock

President Barack Obama and the Democrats are spinning out of control.

Their characterization of the causes of the financial crisis is inconsistent with historical reality, as is their characterization of the records of the two major political parties.

As broken as American politics seems, the fix may be as simple as beginning the next conversation with an honest assessment of recent policy history and the role that each party played in guiding it. The fact is that the Democrats have governed far more sensibly than today's leftists want to admit, and Obama's biggest political problem may simply be that his preferred story line fails to acknowledge that legacy.

Listen to Obama, and it is recent Republican policies that caused the financial meltdown. George W. Bush and the Republicans did so by recklessly cutting taxes and aggressively deregulating. "If you want the same kind of skewed policies that led us to this crisis, then the Republicans are ready to offer that."

The assertion is suspect at best. If Bush's tax cuts had lead to unmanageable deficits that caused a collapse in confidence in U.S. Treasuries, then Obama might have an argument. Nothing of the sort happened.

And on regulation, Bush changed little. The uncomfortable truth is that bad things happened, and there is plenty of blame to go around.

Popular Conception

Obama's rhetoric plays to the misconception that the Republicans are the party of irresponsible deregulation, small government and tax cuts that favor the rich, while the Democrats are the reverse. But the policy history back to Jimmy Carter is inconsistent with that view.

Let's look at each key component, spending, regulation, and taxes, in turn. Contrary to popular belief, the relationship between the party in the White House and government outlays is the opposite of what one might expect.

Under Carter, total government outlays as a percent of gross domestic product averaged a relatively stable 20.8 percent. Over the next 12 years, when Republicans Ronald Reagan and George H.W. Bush resided in the White House, spending increased, averaging 22.2 percent of GDP.

The trend reversed under the Democratic leadership of Bill Clinton. Government on average consumed 19.8 percent of GDP during his term.

Finally, Republicans under George W. Bush undid the progress made during the Clinton years with spending rising from just 18.2 percent of GDP in his first year, to 20.7 percent by the time he left office.

Shifting Balance

Digging deeper into the breakdown of government outlays reveals that the parties allocated spending differently during their reigns. For example, while Carter and Reagan both spent the same 9.9 percent of GDP on discretionary items, Carter split this spending evenly between defense and domestic programs (4.8 percent and 4.7 percent, respectively), while Reagan raised defense spending (5.9 percent) and cut domestic (3.6 percent). Clinton reduced defense spending, while the younger Bush did the opposite.

A Martian who sifted through the spending data would probably conclude that the Democratic Party is the party of small government, and that it accomplishes this in part by reducing defense spending.

The regulation story is more complicated, and at odds with the Obama rhetoric. In his 2005 book, "The Competition Solution," former Clinton adviser Paul A. London shows that a bipartisan consensus around deregulation existed for many years, and that measures that began in the late 1970s and continued thereafter were largely the cause of the prosperity of the 1990s.

1990s Boom

London suggests that the competition fostered by deregulation was more responsible for ending inflation and encouraging investment than monetary policy or tax cuts. In his view, "credit for the 1990s is due to many changes and many tough decisions taken by political leaders from both parties over a much longer period of time." Presidents John F. Kennedy, Lyndon Johnson and Richard Nixon supported the notion of deregulation, but had been unwilling to confront entrenched interests, according to London.

The first president to take real action was Gerald Ford, who put more pressure on regulatory agencies to foster competition and enforce antitrust policies, but stopped short of proposing legislation.

Carter's Legacy

The deregulation movement truly began with the Carter administration. Under Carter, three major deregulatory acts were passed by Congress--the Airline Deregulation Act of 1978, the Motor Carrier Act of 1980, and the Staggers Rail Act of 1980. If these courageous steps hadn't been taken and then proven so successful, one wonders if subsequent measures by Reagan to continue the Carter legacy would have had any chance of success.

In the Reagan era, deregulation efforts can be clearly seen through the reduction of federal regulatory employees--roughly 16,000 jobs, or 14 percent of the regulatory corps. Regulatory staffing returned to its pre-Reagan levels during the first Bush administration, but declined slightly under Clinton as he endeavored to reduce the deficit.

Lastly, contrary to the accepted narrative, not only did the second Bush not preside over a decrease in regulation, his administration actually saw an increase in the regulatory workforce.

On taxes, the story is inconsistent with the history as well. Carter didn't increase taxes much. His major move was a so-called windfall profits tax on oil companies. Reagan did reduce the top marginal income tax rate in his first term from 70 percent to 50 percent, and then to 28 percent in 1988. But he increased taxes in 1982, and again in 1983 when he allowed the payroll tax to go up to help save Social Security, and again in 1984.

Tax Increases

The first Bush famously increased the tax rate, as did Clinton, while George W. Bush brought them back down. On balance, then, one would have to say that Republicans did reduce taxes, but they have been willing in the past to increase them when needed to reduce deficits. This even applies to the Republican demigod Reagan.

Putting it all together, it would be easy to make the case that a bipartisan consensus like the one that prevailed for three decades would entail government spending equal to about 20 percent of GDP, regulation as limited as prudence allows and tax rates that are low unless long-term deficits are high. Obama has deviated from this consensus, but a return to it could easily define a path back to sanity.

Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.