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Home Publications Blogs Beat the Press Glenn Kessler Gets It Mostly Right on Budget History

Glenn Kessler Gets It Mostly Right on Budget History

Thursday, 07 March 2013 08:07

Glenn Kessler used his Factcheck column to take Senator Barbara Boxer to task for giving the Democrats credit for the budget surpluses at the end of the Clinton administration. Kessler rightly points out that the spending cuts and tax increases put in place by the Clinton administration would not have moved the budget to a surplus had it not been for the boom that was driven by the stock bubble. I have made the same point in other contexts.

There is one important part of the picture that Kessler leaves out. In the 1995 projections that he cites, it was assumed that the unemployment rate could not fall below 6.0 percent. The idea was that in order to prevent inflation, the Fed would slam on the breaks by raising interest rates. This would slow growth and prevent the unemployment rate from getting or staying below this target unemployment rate.

The budget projections might have been right if someone other than Alan Greenspan had been at the Fed at the time. Greenspan, who is not an orthodox economist, decided to let the unemployment rate fall below the 6.0 percent target because he saw no evidence of inflation. He had to argue with the Clinton appointees to the Fed who wanted to raise interest rates to head off inflation.

It was really due to Greenspan's policies that the unemployment rate was allowed to fall to 5.0 percent and eventually to 4.0 percent as a year-round average in 2000. This allowed millions of people to work who would not have otherwise had a job. The tight labor market also allowed for large gains in real wages for workers at the middle and bottom of the wage distribution for the first time in a quarter century. Oh, and for the DC policy wonks, it also gave us a budget surplus.

Anyhow, if we want to give credit to someone for the budget surpluses at the end of the Clinton administration it really should be Alan Greenspan (who I trash every other day of the week). It was only because he was willing to ignore the dogma in the economics profession that we were allowed to see what the world looks like when we have something resembling full employment.

Comments (9)Add Comment
Masters of the Universe Giveth and Taketh Away
written by Last Mover, March 07, 2013 8:03
So sayeth Lord Greenspan of Asset Bubbles.

Job 1:21, King James Version as Modified by Wall Street


*Note all instances of giveth were wiped out by taketh except for the one percenteth.
written by skeptonomist, March 07, 2013 8:38
Wait a minute - is the Fed supposed to blow the whistle on bubbles by raising interest rates, or is it supposed to encourage them? Greenspan was aware that the stock market was getting unrealistic in the late 90's; his remark about "irrational exuberance" became famous, although he seems to have taken no action on the matter. It was not just stock prices - too many resources were allocated to budding internet and other technical enterprises. Shouldn't the Fed have raised rates for this reason? The possibility does not even seem to occur to Dean, and today he praises Greenspan instead of trashing him.

Fine tuning the economy by fooling around with interest rates is harder than it looks. In fact, I think it is beyond the capacity of anyone.
Greenspan should have shot at the bubble, while leaving rates low
written by Dean, March 07, 2013 8:51

I would have had Greenspan shoot at the bubble by talking about, using Fed research staff to document its existence and raising margin requirements. I've written about this many times and places (e.g. here http://www.cepr.net/index.php?...cle&id=456 and here http://www.cepr.net/index.php?...cle&id=498), so I didn't forget anything, just trying to keep the piece short and focused.
written by pjm, March 07, 2013 9:02
I remember Joe Stiglitz stating that the 90's boom was set rolling by increased liquidity coming out of changes in some federal regulation (margin requirements?) Was he just speculating?
international context
written by Peter K., March 07, 2013 9:33
My guess is that Greenspan was fighting international crises with low rates. As Baker says he saw no inflation at home. I am not exactly sure about the timing, but in 97-98 there was the East Asian financial crisis, LTCM, and Russia defaulted. Greenspan wanted to provide some support.
Prop Again
written by James, March 07, 2013 10:10
Workers don't share in companies' productivity gains


How long have you Dean talking about this? The difference between the three most recent decades and the previous ones?
written by JSeydl, March 07, 2013 10:36
skeptonomist has a point. Even if the Fed hadn't raised rates but rather just talked about the bubble, it still may have slowed growth and raised the unemployment rate. I would say that we need to go back even further and question why the bubble came into existence in the first place - maybe the trade deficit had something to do with it, and I'm sure Dean agrees on that point. The point is, while full employment in the late-1990s was great, we should really strive for full employment absent economywide bubbles.
Should Bernanke Kill the Obama Rally?
written by Paul Mathis, March 07, 2013 11:49
The 4 year old Obama Rally in the stock market is now the 6th strongest in Dow history and many pundits are calling it a "bubble". So what should Bernanke do so that he doesn't repeat Greenspan's "mistake" of 2000?

Clearly, there is no threat of inflation and interest rates are very low, but if the stock market crashes again, we are back in a recession.

What is the lesson of history here?
Greenspan flip flop
written by FoonTheElder, March 11, 2013 11:46
The same Greenspan who immediately gave his blessing to Bush tax cuts and kept interest rates low, which was a major factor in the housing bubble.

Greenspan had one solution (deficit fighting) for Democratic Presidents and a completely different solution (deficit creating) for Republican Presidents.

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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.