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Clinton's Surpluses Were Due to the Stock Bubble

Thursday, 06 September 2012 08:20

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.



Many good questions are raised below. I'll just address a few points. First, I have zero interest in getting into debates on the budget deficit. I don't care whether the government runs a budget surplus, so the particular accounting is of no interest to me apart from the fact that it needs to be consistent through time. I suppose we can have some good make work jobs having people design new budget methodologies, but I don't intend to get involved myself.

In terms of the causes of the deficits/debt, a lot depends on the baseline. My baseline was 1996 since I wanted to show that Clinton did not give us a balanced budget/surplus, the stock market bubble did. The spending/tax cuts that followed the recession were needed to boost the economy. Unless you like to see people out of work, you should be happy for the deficit. Of course the tax cuts and money spent on the war could have been much better directed, but if the choice was no tax cuts and no additional military spending versus what we got, there can be little doubt that the latter created more jobs.

Comments (15)Add Comment
written by skeptonomist, September 06, 2012 9:45
I think Dean is right that the "huge" surpluses (they were actually small if you don't use the phony "unified" budget) were a result of a bubble and that bubbles are not a good idea. But note the policy dilemma faced by the Fed at that time. If the Fed is supposed to detect and deflate bubbles, shouldn't they have raised rates or taken some other action, as Meyer and Yellen advised? But in this post, Dean seems to think that that would have been the wrong thing to do since unemployment continued down from 6% to 4%. Dean, should the Fed have taken action against the bubble or not? The Fed did start raising in 1999 but it was probably too late by then. I say again that the Fed could not possibly do all the things expected of it by some economists, even if its directors were not human beings subject to political pressures.
Shoot the Bubble, not the Economy
written by Dean, September 06, 2012 9:51

My recipe would have been for Greenspan to document and warn of the stock bubble in Fed papers and public speeches. I think this would have likely tanked the bubble pretty quickly. The market sure responded to his "irrational exuberance" comment that he quickly retracted. I realize that absent the bubble growth would have slowed, but he could have tried other tools like lowering interest rates further.

This is the same story with the housing bubble. It is a bad idea to rely on a bubble to sustain the economy.
Only one surplus, and it was 2%
written by Bill Heffner, September 06, 2012 9:53
Skeptonomist is entirely right, but doesn't go far enough. If one drops the bogus "unified" budget thing and looks only at the federal budget and revenue, Clinton had deficits all years but one, when he had a 2% surplus. The budget returned to deficit the next year, well before the infamous "Bush tax cuts" were in effect.
Surpluses vs. Deficits
written by Aaron, September 06, 2012 9:56
I think it is fair to say that the stock market bubble explains the numbers behind the surpluses, but there's more than that to the political picture.

When the Democrats ran surpluses, the additional revenue resulted in their eliminating the budget deficit and potentially reducing the debt. When the Republicans inherited the surplus they announced that "deficits don't matter" and on the basis of Greenspan-type "concerns" about paying down the deficit too quickly and dubious economic theories (e.g., the Laffer curve), deliberately reduced government revenue.

The lesson I draw is that while the Democrats may have been lucky in terms of what created the surpluses, under the Republicans it is unlikely that we would have had surpluses - they would have immediately used the projections to implement Bush-style tax cuts at an earlier date.

I take your comments as something other than Cheney's "deficits don't matter", but we can't get around the fact that running constant deficits is how we end up with ever-increasing debt. I am concerned with long-term sustainability (that involves more than the fact that the U.S. government is presently able to borrow at extraordinarily low rates) and implementing better policy when the times are good so that we don't have all of the kvetching about how "we can't afford this" when the economy sours and we would benefit from deficits and stimulus. The point being, unfortunate though it may be, we can't separate the economics from the politics.
surpluses are matched by deficits
written by joe, September 06, 2012 11:45
the flip side of a federal govt surplus is that the private sector was spending more than it earned. On June 29, 1999 the Wall Street Journal had two articles on its front page, one applauding the budget surplus and the lamenting the decline in the savings rate, and they couldn't see that these two things are linked. Your income is someone else's spending... I can't give the deficit to the nearest billion without calculating but I know it's approx 8% of gdp, savings rate is ~3 to 5%, let's say 4% and trade deficit is around 4%, so 4% savings + 4% trade = 8%, so the deficit must be around 8%. Pretty easy.
why is that?
written by David, September 06, 2012 12:23
I do love Clinton, he's a brilliant politician that knows how to paint the fiddly bits around the edges. He got a few things right last night, too.

But Dean is right, bubbles are no way to run an economy. See if you can spot when the two bubbles mentioned above burst (and, beyond those, the S&L fiasco), using the following graph of the deficit, which could perhaps be dubbed "Minsky's Revenge"

Squaring the Circle
written by David, September 06, 2012 1:35
Dean, help me understand something. On the one hand, you say that most of the surplus between 1996 and 2000 was not due to legislative changes, and that maybe half of it was due to the stock bubble. On the other hand, in his blog Ezra Klein says the unforeseen (by people who aren't you) collapse of the stock and real estate bubbles account for only 1/4 of the last decade's debt accumulation, half of which comes from legislative changes (wars, etc.)

It seems like you're saying the stock bubble alone accounts for most the swing from deficits to surpluses in the latter half of the 90s, but Klein is saying the collapse of both bubbles accounts for only 1/4 of the swing from surpluses to deficits in the last 10 years. Put another way, you emphasize the role of the stock bubble in the 90s, while Klein emphasizes the role of legislation after 2000.

I realize these are not the same thing (two different time periods), and it's not necessarily contradictory. It just seems like it MIGHT be contradictory. How do you reconcile the stock bubble being SO important in the 90s, while the stock+housing bubbles were LESS important in the following decade (assuming Klein's 1/4 estimate is correct)?
Stock bubble accelerated by special treatment for capital gains
written by H-Bob, September 06, 2012 2:04
The special lower rate for capital gains was adopted in 1998, so the effect of that lower rate probably began to be noticed in mid-1999 (after the September filing of the 1998 tax returns) and early 2000 (the peak and breaking of the stock bubble). The capital gains tax cut gave the wealthy more money to throw at the stock market, leading to higher stock prices.
While the stock bubble accelerated the reduction of the deficit, the Clinton budget plan did put the deficit on a consistent downward trend, unlike the Reagan, Bush and worse Bush.
timing and dates
written by Peter K., September 06, 2012 2:45
I am sincerely confused as well. Baker writes

"His Clinton appointed colleagues, Lawrence Meyer and Janet Yellen, wanted to raise interest rates in 1996"

when my understanding is that Greenspan lowered rates in 1998 in response to Russia's default when many on the FOMC wanted to raise rates. Maybe it happened in 96 and 98? Is there a website with the info?
written by urban legend, September 06, 2012 3:00
The unemployment rate was at 3.9% for the entire last quarter of 2000, well after the collapse of the dot-com bubble earlier that year, and still was at 4.9% the month Bush's tax cuts went through, almost two full years after the dot-com collapse. The unemployment rate continued rising for almost another two years after those cuts, so it's hard to see any stimulative effect from those tax cuts. Or why there would be when they were weighted so heavily towards the wealthy, who spent the next seven years not doing something productive with their windfall, but chasing after returns like they had enjoyed in the tech part of the stock market. Derivatives that were impossible to understand were just the ticket for fooling the wealthy into believing they were doing that.
Clinton Surplus: Fact or Fiction
written by gearjam, September 06, 2012 3:46
I must be in an alternate universe. We are actually arguing about whether in the Clinton Presidency there was budget surpluses or deficits. The government has won. They have made their budget so convoluted that we the people can no longer figure out what our government is doing.

The fact is pretty simple, regardless of the smoke and mirrors used in the budget the national debt increased every year Bill 'Bubba' Clinton was President.

(Fiscal years are from Oct 1st to September 30th for each year & the numbers are dollars) The Treasury keeps the official numbers and here they are:
Year President Amount Deficit
01 W. Bush/Clinton5.80T 420,772,553,397.10
00 Clinton5.67T 133,285,202,313.20
99 Clinton5.65T 17,907,308,271.43
98 Clinton5.52T 130,077,892,717.81
97 Clinton5.41T 113,046,997,500.28
96 Clinton5.22T 188,335,072,261.61
95 Clinton4.97T 250,828,038,426.34
94 Clinton4.69T 281,232,990,696.07
93 Clinton/ H. Bush4.41T 281,261,026,873.94
Total 1,395,974,529,060.68

As you can see the national debt never decreased. These numbers come from the Treasury Department under the public debt. You can easily look the numbers up.

What is more important than the issue of surplus or deficit in any year, is the fact that ordinary citizens cannot agree on the numbers. We the people are being dazzled by the fancy accounting gimmicks and politics by all of them, to so cloud something as simple as do you take in more or less money then you spend. It’s that simple. Facts are facts and fiction is fiction – Clinton did not have a surplus.
written by liberal, September 06, 2012 10:04
gearjam wrote,
They have made their budget so convoluted that we the people can no longer figure out what our government is doing.

Only if you're too stupid to understand the meanings of "debt held by the public" and "intragovernmental debt".
written by david j michel jr,, September 06, 2012 11:42
praise the lord ,a blogger who does not velcrow his lipps to bill clinton and obamas ass!
written by dfsg, September 07, 2012 9:13
hsdgaug wehggkd
written by Bob Pinkus, September 11, 2012 8:01
The surplus of the Clinton Presidency was caused by a technological revolution (the digital revolution) - new products were brought to market, everyone needed to buy them.

The stock market bubble was another example of Wall St stupidity.

CEPR seems to be making the same mistake everyone has made since that bubble blew.

Even without the stock bubble, jobs would have been created, new revenues would have erased the deficit. That is the nature of technological revolutions.

The 1920s were similar. There would have been a boom without the over-exuberance of the stock market.

The fact that investors were out of control is a different event from the revolution that occurred, bringing many new products to market that consumers couldn't live without (e.g. radio, affordable automobiles, appliances, new styles of living).

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.