Kristof Perpetuates the Clinton Budget Myth

Nicholas Kristof is mostly on the mark in his column this morning, but he does repeat the Clinton fiscal responsibility balanced the budget myth. This is not true.

An examination of the Congressional Budget Office's (CBO) projections from the 1990s shows that in 1996 CBO still projected a deficit of 2.7 percent of GDP for fiscal year 2000. Instead, we had a surplus of 2.4 percent of GDP, a shift of 5.1 percentage points of GDP (@$750 billion in today's economy).

This shift did not come about from tax increases or spending cuts. CBO estimates that the tax and spending changes between 1996 and 2000 added $10 billion to the year 2000 deficit. The shift was entirely attributable to faster than expected economic growth and especially the decision by Federal Reserve Board chairman to allow the unemployment rate to fall to 4.0 percent.

CBO had projected an unemployment rate of 6.0 percent for 2000. This was the conventional estimate of the NAIRU (non-accelerating inflation rate of unemployment) at the time. It was only because Greenspan ignored this nearly universally held view in the economics profession (and the Clinton appointees to the Fed) that the economy was able to grow enough to get the unemployment rate down to 4.0 percent and to bring the budget from deficit to surplus.

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written by skeptonomist, July 14, 2011 9:32

The big changes in tax rates were during the Reagan administration, when progressivity in income-tax rates above the poverty level was essentially obliterated:

http://www.skeptometrics.org/Brackets.png

Not suprisingly, debt/GDP shot up at that time. The increases during the Clinton administration were not large and as Dean says were not really responsible for the temporary downturn in debt/GDP in the 90's. In any case, the Bush cuts were a very minor event in all this, and allowing them to expire is not going to have much effect - much greater increases are required.

Would high marginal rates be harmful? In many respects, the best peacetime economic performance in the U.S. was during the 60's, when those rates were highest.

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written by joe, July 14, 2011 12:17

skeptonomist, that's a good point about the 60s. When Pawlenty was talking about 5% real growth required the top rate to drop down to 25% I had to laugh because from 1950 to 1978, real GDP growth exceeded 5% twelve times when the top rate was between 70-90%. Since Reagan's 1981 tax cut, real GDP growth exceeded 5% once and that was in 1984 when the top rate was 50%.

You have to wonder whether discouraging successful people from working generates stronger growth because it creates opportunities for people who are less successful. My grandfather was a successful personal injury attorney during the 50s and he told me the 90% rate forced him to reject cases. Of course someone still needed to sue the insurance company so someone less experienced got the work, the experience and an opportunity to establish their reputation.

Kristof Perpetuates the Clinton Budget Myth

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