Unless You Want Another Recession, Don't Pine For the Clinton Surpluses
The other day, in one of their e-mails, Democracy For America (DFA) posed the choice for me in the 2010 elections this way:
This election, the choice is clear:
- Republicans like John Boehner and Mitch McConnell want to retain the Bush-Cheney reckless tax cuts for the wealthy that created out of control budget deficits and lead America into a jobs-losing recession.
- Democrats like Barack Obama and Patrick Leahy want to return to the booming Clinton-Gore economy that led to balanced budgets and created over 22 million new jobs.
Well, I certainly don't want the Bush-Cheney tax cuts for the wealthy to continue, because all the rich seem to do with these is to invest in foreign nations, and to buy off American politicians. So, if we could end those, create a number of new brackets, make the top marginal income tax about 70% again, close loopholes, and make the inheritance taxes once again a useful instrument for blocking the formation of hereditary aristocracies again, I'd be very happy about that.
The 22 million new jobs would also be nice. But they're not enough because there are 25 - 30 million people who are now under- or unemployed, and the population is growing, so we need something like 30 – 35 million jobs, and in much less than eight years, unless we want the under- and unemployed to continue to suffer. As for the balanced budgets, that's another matter entirely. W. Randall Wray looks at the history of budget surpluses in this way:
. . . Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. . . .
And what happened after we ran those surpluses? Randy says:
. . . The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. . .
In case you think this record is a coincidence. It is what we'd expect according to the economic narrative of Modern Monetary Theory (MMT). MMT emphasizes the accounting identity: Private Sector Surplus – the Current Account Balance – the Government Deficit = Zero. Right now, for example, the desire of people to save resulting from the recession and its attendant insecurity is producing a private sector surplus. The current account balance is negative because we're still importing a lot more than we're exporting, and also because foreign nations very much want to get USD in return for their real wealth. So, the Government deficit has to be high to make things balance out at zero.
Now let's say the Government tries to drive down the deficit by cutting spending, raising taxes, or both, as the deficit hawks and doves recommend over different time frames. Then either exports, or private sector savings, or both will decline. Or perhaps automatic stabilizers associated with the social safety net will drive spending up in unanticipated ways despite the Governments targeted spending cuts.
The point is that Government surpluses imply withdrawing financial assets from the private sector. The longer the surpluses continue, the more the other two sectors will decline. Eventually, the private sector will be so drained of financial assets that if credit is, or becomes, unavailable, consumption can't be maintained at previous levels and economic activity spirals downward.
That's exactly what happened at the end of the Clinton Administration. The four years of Government surpluses withdrew financial assets from the private economy and led to the decline of economic activity very late in the Clinton-Gore years and early in the Bush Administration.
Bush began to run deficits again, of course, but these deficits were for tax cuts and foreign wars, relatively low multiplier activities associated with government spending, so the economy didn't recover to earlier levels until 2005, or so. Perhaps the only reason why the Clinton/Bush recession wasn't itself a classical depression, is because of the effects of the automatic stabilizers provided by the social safety net.
The lesson, of course, is that it is wrong to wish for Government surpluses in the US or to try to produce them, short of an inflationary period. Furthermore, in limes of low inflation, when the economy is performing well, there will be a drain of demand due to the perfectly normal desire of the private sector to save, and also because of our long-term state as a net importer of real wealth. Both of these lead to a leakage in demand. If the Government does make up for that leakage with deficit spending a recession or depression must eventually result.
DFA's nostalgia for the Clinton surpluses is not something we ought to share. On the contrary, it's something Democrats ought to fear, as they also ought to fear President Obama's obvious long-term desire to replay the Clinton scenario, and Hillary Clinton's mistaken belief that continuing deficits are a "national security" threat. They are the opposite. They are the norm. And even in good times, and in the absence of inflation, that are the normal state of an economy and a society looking for continual growth, prosperity, and full employment for its citizens, the US needs Government deficits to compensate for the leakage of demand that will always be present due to private savings, and a negative current account balance. So, in general, deficits are a positive good; not something to be avoided or extinguished, unless we have to cool an overheated economy.