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Home Publications Blogs Beat the Press Tell Jacob Lew, The Economy, Not Deficit Reduction, Gave the Country a Balanced Budget Under Clinton

Tell Jacob Lew, The Economy, Not Deficit Reduction, Gave the Country a Balanced Budget Under Clinton

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Monday, 16 May 2011 03:49

The NYT has an article discussing the possibility of an automatic spending cut rule as a mechanism to hit deficit targets. It quotes President Obama's budget director, Jacob Lew, on the past success of such rules.

Mr. Lew credits such budget rules for reaching a balanced budget in the 90s. Actually, these rules were of limited value relative to much better than expected economic growth. In 1996, the Congressional Budget Office (CBO) projected a deficit in the year 2000 of 2.7 percent of GDP. The government actually ran a surplus of 2.4 percent of GDP, a shift of 5.1 percentage points of GDP, the equivalent of $750 billion in today's economy.

According to CBO, none of this shift from deficit to surplus was the result of spending constraint or tax increases, its scoring shows that legislated changes over this 4-year period actually raised the deficit by $10 billion. By far the biggest reason that the budget shifted from a large deficit to a large surplus was much better than expected economic growth.

This growth pushed the unemployment rate down to 4.0 percent in 2000. CBO projected that it would be 6.0 percent. Mr. Lew should know that it was economic growth, not spending constraints that led to the Clinton surpluses. The NYT should have pointed this fact out to readers.

Comments (4)Add Comment
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written by izzatzo, May 16, 2011 6:54
Exactly. Automatic destabilizers are as important as automatic stabilizers in a deep recession. Without them stabilizers would reel out of control and become unstabilized themselves.

This is why automatic spending cuts under Clinton were able to achieve deficit targets, because they offset the unautomatic spending increases that would have overshot the target.

Any economist recognizes this as a double negative feedback loop.
but tax increases did...
written by frank, May 16, 2011 2:38
I'm sure you know that starting in 1996 excludes the tax increases by both the Bush and Clinton administrations, which cut the deficit by 1 and 3 percent of GDP, respectively. Without those tax increases surpluses would have been impossible. I'd guess that tax increases will be required now to have a shot at a reasonable deficit targets. But of course growth would be a great jump start in that direction
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written by S.D. Jeffries, May 16, 2011 9:26
If congress spent half as much time figuring out how to put the 17 million or so unemployed and underemployed people in this country back to work as they do arguing about the deficit, much of the deficit would take care of itself. Apparently that's too difficult a problem, though, for our "leaders" to tackle. It's obviously much easier to just bitch and moan about the deficit and increasing debt and use numbers, real or imagined, to bludgen their political opponents.
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written by Fed Up, May 16, 2011 9:55
"By far the biggest reason that the budget shifted from a large deficit to a large surplus was much better than expected economic growth."

You like to talk about the housing bubble, what if there was not an internet bubble? What would economic growth been without it?

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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.

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