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The Democrats’ discussion of the loss of the Clinton budget surpluses is a tale of paradise lost. Unfortunately, it was an illusory paradise that serious people should not concern themselves with. That is why it is disappointing to see Ezra Klein give us more tales of the evaporating budget surplus.
The huge surpluses of the last Clinton years were the result of a boom that was driven by a stock bubble. The boom was great. Millions of people got jobs who would not have otherwise. We also saw real wage gains up and down the income distribution for the first time since the early 70s.
The greatest minds in the economics profession had assured us that the unemployment rate could not get below 6.0 percent without touching off accelerating inflation. However the boom pushed the unemployment rate down to 4.0 percent as a year-round average in 2000. Guess what? There was no story of accelerating inflation. (Fortunately for economists, continued employment, and even standing in the profession, does not depend on performance.)
But the key point is that the surplus came from a boom that was not sustainable. Here’s the key chart that shows you how we went from the deficit of 2.7 percent of GDP that the Congressional Budget Office had projected in 1996 for 2000 to the surplus of 2.4 percent of GDP that we actually saw in 2000.
Source: Congressional Budget Office and author’s calculations.
This was not a story of tax increases and budget cuts, those had already been on the books by 1996. This was pure and simple a story of the bubble-based boom pushing the economy much further than CBO had expected. (Greenspan deserves a huge amount of credit for allowing the unemployment rate to fall. His Clinton appointed colleagues, Lawrence Meyer and Janet Yellen, wanted to raise interest rates in 1996 to keep unemployment from falling much below 6.0 percent.)
Anyhow, when the bubble burst, the surplus was destined to vanish. The Bush tax cuts and even the wars helped to stimulate the economy and maintain employment. There were much better ways to boost the economy, but it is absurd to imagine that the economy somehow would have been better off without this spending.
To repeat a post from last week, the real tragedy of both conventions is that policy is so obsessed with the deficit. No one apart from a few policy wonks in DC even has a clue as to the size of the deficit. (Quick, give it to me to the nearest hundred billion.) Contrary to the scare stories, the burden of the debt (a.k.a. interest payments) are near a post-war low as a share of GDP, not a record high.
Source: Congressional Budget Office.
Topics one, two, and three should be jobs, jobs, and jobs. The deficit is a distraction. And the tale of the vanishing Clinton era budget surpluses, well that’s something for retired budget wonks to reminisce over in their golden years.
Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared
43 Comments
I would just like to say that while I understand FDL’s policy regarding blocking videos, the huge red squares on this post are very distracting. Could there not be a more polite way to do this? I think the points in Mr. Baker’s diary are worth consideration, but it is very hard to concentrate with huge red squares in the way. (Just a suggestion.)
First I agree with juliania above.
But to the topic, it was the tech stock bubble of fraudulent tech start ups which of course collapsed right under the GWB administration.
Wonder if that was planned ? Hummmm
Government surpluses are generally a very bad thing. Surpluses are a zero-sum game. The government’s positive surplus is the private sector’s negative surplus (deficit), i.e., we had to dip into our savings to pay our taxes, because we got less from them in government spending that they got from us in taxes. And, if you throw in the fact that we had a trade deficit, i.e., the foreigners had a surplus, then it was even worse for us.
Per Prof. L. Randall Wray, writing at HuffPo:
Last week, Joe Weisenthal published a very interesting article at Business Insider, entitled “The Untold Story of How Clinton’s Budget Surpluses Destroyed The American Economy”.
Per the U.S. Code Federal Reserve banks are supposed to police that sort of thing:
The problem is that Alan Greenspan didn’t believe in regulation. He, in true Ayn Rand fashion, believe that free markets are self regulating. That’s the famous FLAW about which he testified before congress — see the movie “The Flaw.”
True.
Clinton’s true genius was to leave office prior to the tech-bubble crash.
In retrospect Clinton is symbolic of the triumph of third-way politics and that is where the democrats basically folded and became republicans in order to access corporate ca$h.
Clinton was an enthusiast of deregulating the financial sector, and he can’t escape blame for that, and here we are.
Clinton is the one who cut what lttle connection the democratic party had with the interests of the 99%.
Clinton was well remunerated in cash,for his stock bubbles….the insiders his cronies made boatloads of cash before selling short all the other rubes
Yes, but he “felt our pain.”
That’s the new Democratic party: we get their empathy, and the 1% gets the money. A very convenient separation of concerns.
Thanks very much for enabling the graphs, and for the informative comments – you are a good lot!
I’m not an economist, but I don’t understand why interest payments on the debt are compared to GDP? Why not compare them to revenue?
Wow, wigwam, thank you very much for your post, and especially the linked article. I had not connected the Clinton years to the rise in home mortgages before he deregulated at the end of his term. I simply thought of the success being due to the tech bubble.
Joe Weisenthal writes that the Clinton surplus was:
“…counterbalanced by low household savings, high household debt, and the real revving up of the Fannie and Freddie debt boom that had a major hand in fueling the boom that ultimately led to the downfall of the economy.”
This didn’t just happen. They knew what they were doing.
i knew a few people who mortgaged their homes to buy stocks,terribly sad
Hi Juliania. There are two aspects of monetary dynamics at work here:
* The intersectoral balance equation: the sum of the surpluses has to be zero, i.e., if one sector has a positive surplus, some other sector(s) have to have negative surpluses, i.e., deficits.
* The propensity of banks to generate bubbles, because they pay for everything with money that is freshly generate out of thin air. (Literally, they can’t afford not to speculate. When they find the beginning of a bubble, it’s their fiduciary responsibility to bid it up. The Fed is supposed to stop them, but the Fed is run by neoliberals who believe that markets are “self regulating.”)
The other thing – When Clinton signed off on two major “Bank reform” bits of legislation, in the two years before leaving office, there was a huge “quid pro quo.” He helped the Congressional critters get rid of Glass Steagall, so they could then make good pledges guaranteeing their campaign monies from the true Powers that Be – The financial Firms. Only Senator Dorgan of Nebraska warned about how getting rid of Glass Steagal would hurt America’s middle-incomed group of people.
But one voice in the wilderness is easy to ignore, especially when the Big Main$tream media is given advertising revenue to ignore such wisdom.
In any event, Clinton leaves office. So what was the “quid pro quo”??
After years of him and Hillary being nearly bankrupt, due to lawsuits, he then embarks on a career of giving speeches at $ 125,ooo a pop. Within just a few years, the Clintons have a net worth of close to 100 Millions of dollars – some 20 million of which came from her book sales, and the rest from his speeches.
The Housing Bubble bursts in 2006. This is followed by the Full Scale Depression that wiped out the middle class in 2008. It ends up – Senator Dorgan of Nebraska knew what he was talking about. I do think that Clinton has a conscience – he knows on some level that his signing off on the Glass Steagall elimination also eliminated the middle class. Thus the quad heart surgery of a few years back.
Not all of it was fradulent bubble activity. One of the VPs I knew that that helped build out the “bones” of the present global TelSatCo infrastructure said in a business meeting I attended post Dot_Bomb that the banks inexplicitly and prematurely “called in the chips” on their operations just after the inventory activities that did occur during Y2K. This was an important confirmation to me of the “controlled demolition” of the Tech/IT/Sci/Engineering sectors I suspected that had to complete prior to 9/11 and the implementation of the AUMF in the US. Just prior to 9/11 I been full bore involved internationally in the M&A race at the manufacturing level that had completed. So I say “Yes,” as the consolidation of the infrastructure operations, ownership and control of the global communications systems had to be developed enough to be in place for the Security State then consolidated so that it could be placed firmly under the Pentagon’s control concurrent with the booting of Lieberman’s DHS. So I see 9/11 as the ultimate false flag event on US soil.
“9/11: Explosive Evidence – Over 40 Scientific Experts Speak Out” (Full Documentary – PBS Video)
“Zero: An Investigation into 9/11”
Listen carefully to the subject thread herein regarding “guinea pigs” and what’s still happening ten years later to witnesses: “911 Dust: A Journey to Healing”
I do know that it left a hell of a lot of dark fiber run. The state of Florida got a lot of it at bargain basement prices. Wonder who got the rest.
ZING!!!
Well done, Juliana.
Google bought up a helluva lot of dark fiber in those days.
As I recall the history, the Clinton surpluses started to develop after Bill raised taxes on the rich. 1993ish.
The stock market bubble was in the late 1990s.
But let’s not let facts get in the way of a good story.
Actually you misremember history. The first surplus was in 1998:
http://en.wikipedia.org/wiki/Bill_Clinton
While the dot-com bubble started in 1995:
http://en.wikipedia.org/wiki/Dot-com_bubble
I won’t dispute that a good part of the surplus came from the bubble, but the tax increase under Bush and if I recall correctly another one under Clinton combined with economic recovery helped a lot. So did the fall in the interest rate on government debt. It is certainly true that the bubble bonus was bound to vanish, but once the debt was down, the savings on interest plus ordinary income at full employment (assuming that the dot-com bust would not have wrecked the economy in absence of a real estate boom)would have brought the debt down even more. I don’t know the numbers and am making this up as I go along, but it would be a simple exercise to calculate the full-employment budget surpluses from 2000 to 2010, absent any bubble bonus. That ought to be the test of the Clinton fiscal regime.
The obvious counterfactual is to suppose that there were no constitutional impediment to Clinton’s having a third term. He would have won in a landslide. The tech bubble busts no matter what. What kind of macro-policy does Clinton run? Clinton is economically way more savvy than Obama, and despite everything, Summers, whom he listens to, is no dope. So it is not outside the realm of reality to think that in the face of the stock market crash, they might have engaged in public works or some kind of expenditure supporting the states.
Actually, as I write this, I realize it wouldn’t happen. Summers was too conventional. He would have supported monetary ease–not just in the short run to relieve the liquidity stress, but in the long run. Damn!
I don’t misremember history.
If you read what I typed, it was
Bold added this time to engage reading comprehension.
Not disputing that stock market bubble capped the budget surplus story, just adding that without the tax increases on the rich in the early 1990s, the latter 1990s would not have shown surpluses even with the stock market bubble.
But as I said, why let facts & analysis get in the way of a simple minded story.
Theorems. You standardize on GDP because interest is part of the GDP that has to be raised by tax in the long run if the government debt is going to be regarded as sustainable. Thought experiment: suppose the interest share of GDP rises by 1 percent per year. How many years do you think it will take before lenders come to the conclusion that interest will not be paid?
GDP IS the revenue of the economy.
Answer. Zero years. Lenders look ahead and realize that bankruptcy will happen in, say, 10 years. But they re smart enough to know that other lenders are making the calculation. Now, would you bail in 9 years? No. Because the other lenders know you will bail. 8 years? Same calculus. You work your way back year by year, and what do you know? You are at Now, and the smart play is to bail. That’s the logic. Whether it works out in practice, as Yogi Berra said, is another thing altogether.
Surpluses can’t fuel anything.
Clinton also knows, as he did then, that he did not have a veto-proof majority in congress when he signed the Gramm/Leach/Bliley (or”GLBA” – “Financial Services Modernization”)Act of 1999. He literally had NO choice that wouldn’t have been seen as a weakening, feckless saber-rattling gesture of defiance.
Incidentally, the ONLY coruption-(loophole/amendment-)proof way to reregulate/”break up” Wall Street banks (or “reinstate Glass/Steagall”) is to SIMPLY repeal that act, in a one-sentence bill.
Why is it simpleminded? It seems to me it is making connections some of us didn’t see, and also I appreciate very much the explanations – I’ll admit I am simpleminded – I voted for Clinton after all, my very first vote as an American citizen. Boy, am I a klutz!
[Oh, and by the way,
http://billmoyers.com/segment/jill-stein-and-cheri-honkala-on-third-party-politics/
Bubbles boost tax receipts and in general boost activity throughout the economy. That is why government loves them. Do you recall a single politician in the nation who warned that the mortgage/housing bubble was a bubble? Of course not. Well let’s be honest. Most Americans love bubbles and hope to participate in one.
What is new is that the Fed under Greenspan and now Bernanke have embraced bubbles. We are in one of the biggest bubbles of all time right now. That being US Treasury debt. I know you don’t believe this. Even if you happen to know that the price of bonds rises when interest rates fall. Even if you know that the Fed buying a trillion in Treasury bonds has raised their price. Your probably hoping they announce they will buy more this week. At least it makes no difference if rates rise because the Fed will not sell and take the capital loss on their Treasury holdings and so do not have to do mark to market accounting.
“Bold added this time to engage reading comprehension”
I read what you said and what you’re saying now, it could just as well be said that Clinton’s surpluses started to develop in 1913 with the 16th Amendment since if we didn’t have that there wouldn’t have been surpluses anyway. Then again, you could have just admitted you were mistaken on your dates.
farting in the tub makes bubbles and it’s never been especially significant to me so let’s just everybody here calm down an’ stop the snootiness, shall we
as for me, i found this post informative
I do not know which economists to believe any more. I think they are all full of **it to some degree, Mr. Baker perhaps less than others, but still…
Here he is saying debt as a percentage of GDP is historically low (post war). But GDP has been artificially vastly inflated by the derivatives market and other questionable financial products, hasn’t it? That would indicate that the risk of financial meltdown (again) overrides the concern over the debt, but it doesn’t properly quantify the significance of the debt especially when the taxpayers have to pay the interest.
I think one of the big problems with economic models is their lack of long term predictability. Economists should be learning why these booms and busts occur and then advocate a full range of policies on both sides of the ledger (reform of taxes and spending) to stop them, taking into account all of the known potential generators and externalities to the extent they can be estimated and understood in a longer-term time frame.
No. Expenditures on financial products are specifically excluded from the GDP. Per the Wikipedia: “Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.” Also, see #3 here.
So far as I can tell, with QE1 and QE2 the Fed has paid off about 10% of our national debt with magic money created out of thin air and without causing any significant inflation. Yes, I hope they do more of it.
BTW, the interest that the Treasury pays the Fed on those bonds is considered to be profit to the Fed, nearly all of which comes back to the Treasury at the end of the year.
Ok. Now I see what why people get glassy eyed when some of us in engineering talk Computer Architectures or 1/f noise.
It was not called a “tech” bubble, it was rightly called the “dot com” bubble. It was based on people engrossed in economic jargon that never thought ahead as to where the cash was going to be generated by this new dot-com thingy. People AND the financial sector would throw gobs of cash at anyone that said they were going to start a new “web-site” or dot com. IPO’s were the rage.
At the time, access was by dial-up and through second parties and there wasn’t much content out there yet. People actually thought that other people would PAY to see sites like Web-MD; they obviously didn’t think too hard about it first. They were, of course, right that the World Wide Web was going to be huge, but no one seemed to think about where all this cash was going to generated from (it’s still going on; facebook stock anyone?). Some of these site builders were literally getting a billion dollars for an idea about what to put on a web site.
It was a frenzy!
Everyone was so convinced that they were gonna’ be the ones that got in on the bottom of the new cash cow, like investing in Microsoft or Apple would have been when they were running out of garages.
The simplified thing was that this was mostly investment money, “extra” money that people had to try to make money off of. Gambling money. If it was needed money for food, clothing, or shelter, then they had no business gambling with it. When it popped, people may have lost their savings, but if they lost their necessities of life; shame on them.
The next bubble that caused this current depression was something that the common guy couldn’t afford to lose: their homes. Plus it was basically forced on the rest of us by the amoral, sleazy, criminal, economic industry and the rest-seeker class.
I would take five dot-com bubble pops over one housing bubble. What’s next, a food bubble?
Sorry, no matter what how convoluted and jargon laced the economic arguments are, the DOT-COM bubble was not caused by Clinton . It was caused by a convergence of the overall desire for people to get rich through unearned income and a completely new technology that invited misinformation and misconception.
I am not excusing the damage from the economic “reforms” that Clinton had a hand in caused.
How many critical institutions failed when the DOT-COM bubble burst?
oops, no edit button;
“rent-seeker class”
I am often of the rest-seeker class!
Quite correct, but Senator Dorgan represents North Dakota, not Nebraska.
And before the dot-com bubble there was the junk-bond bubble, etc.
One of the problems is that banks, which are sort of pawnshops for securities of all kinds, don’t buy things with real money. They issue it right there on the spot out of thin air. The Fed is supposed to regulate it, but in those days the Fed was run by a camp-follower of Ayn Rand; he didn’t believe in regulation of markets, which he was sure were “self regulating,” and hence the name of the movie “The Flaw.”
Just to keep the terms straight. The Fed buying bonds does not pay off our debt. They are buying the debt which the Treasury pays back to the Fed to pay off the debt. Yes the interest goes right back to the Treasury.
While this is more demand for Treasury paper and certainly lowers the interest rate the Fed buys only, by law, already issued Treasury paper. They buy it from the giant banks, the Primary Dealers. And what do they do with the money? They buy other financial assets which boosts the price of them, stocks, oil, gold, corn corporate bonds, etc. Some perhaps tinkles down to us but open market operations by their mechanism effect firstly financial asset prices and inflates them, Which in turn attracts more money from the already rich to ‘invest’ in more financial assets. What do we see? Well if you happen to have some stock you get some gain. If your a saver, with interest rates at zero, you see zilch. What you don’t see is much of the money in the real economy.
Democrats tend to speak as though Clinton did it all by magic and all by his lonesome.
Fact is, you either cut spending or take more in, or both.
Tax increases by Reagan and Bush had to have helped. And then, there was ending “welfare as we know it.”
Yes and at fire sale prices.
Pffttt. I recall having a conversation with one of the first managers within the newly formed gOOgle who had just come out of the Dept. of State and had Carlyle Group connections. TelSatCo execs were flocking to the mysterious break out/”start up” in droves.