NCPA - National Center for Policy Analysis

The Surplus, Economic Growth And Government Spending

September 26, 2000

Most economists now agree President Lyndon Johnson's exorbitantly expensive Great Society initiatives paved the way for eventual stagflation under President Jimmy Carter. Big government undermines economic growth. And a sluggish economy results in poorly performing equities markets.

So what would happen if a big-spending president came to power -- particularly at a time when massive budget surpluses gave him the resources to launch a smorgasbord of expensive new federal programs? Experts fear the effect would be to halt -- or perhaps even reverse -- the dramatic stock market gains of recent years.

  • Federal surpluses over the next 10 years are supposed to reach $4.3 trillion -- more than all the accumulated deficits over the past 100 years.
  • After the Dow Jones Industrial Average increased 10-fold during the period 1942-1966, President Johnson launched his Great Society -- halting progress and bringing stock gains to a standstill for 17 years.
  • After peaking at nearly 1000 in early 1966, the Dow suddenly shifted into idle -- or, on an inflation-adjusted basis, fell 70 percent between 1966 and 1982.
  • While government spending bloomed from 17.1 percent of gross domestic product to more than 23 percent in 1983, unemployment rose to more than 10 percent, inflation shot up from 1 percent to 13 percent, interest rates soared and the economy was in recession one out of every four years.

In addition, taxes rose and regulation exploded.

It was not until President Ronald Reagan rolled back the Great Society experiment and cut taxes substantially that the stock market and the economy took off once again.

Many economists fear that the levels of federal spending presidential candidate Al Gore proposes will push spending once again above 20 percent of GDP, necessitate tax increases and derail the stock market boom -- much in the way LBJ's vast expansion of government resulted in 17 years of economic stagnation.

Source: Brian S. Wesbury (Griffin, Kubik, Stephens & Thompson Inc.) "Caveat Investor: Surplus Politics Is Bad News for Stock Market," Investor's Business Daily, September 26, 2000.


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