Sunday, December 8, 2013

What If the Clinton Surplus Survived?

What if this thing happened?  What if that thing happened?  What if this other thing happened?

Asking hypothetical questions can be fun, entertaining, and good exercise for the brain.  However, most “what if?” questions are ultimately unanswerable because we don’t fully know what secondary elements may have changed along with the first, perhaps further altering the landscape in unpredictable ways.  “What if World War II hadn’t happened?” is an obvious example: the causes and effects and changes brought about by that war were/are so far-reaching, that the present-day planet is utterly unimaginable without them.  So, I acknowledge that hypothetical questions can never really be answered.

However, that doesn’t stop me from asking one every now and then.  One that I have recently asked myself is: What if the U.S. government hadn’t given away the 1990s budget surplus via tax cuts and thereby created the deficit? 

The federal budget deficit at the end of Fiscal Year 20013 is $680 billion, $409 billion less than the year before, but still quite considerable.  Democratic President Bill Clinton left the White House in early 2001 with a $127 billion projected budget surplus.  At the end of Republican President George W. Bush’s first full fiscal year, 2002, the federal budget was running a $159 billion deficit.  By the time Bush left the White House, the Congressional Budget Office projected a $1.2 trillion deficit, major chunks of which were caused by his 2001 and 2003 tax cuts, military expenditures for Iraq and Afghanistan, and the unfunded mandate of Medicare Part D (all enacted with the aid of a Republican-controlled Congress).  We were told that Bush’s tax cuts would shift the economy into warp speed, but instead, the Bush years ended up being, in the words of the Washington Post, “the weakest eight-year span for the U.S. economy in decades.”

What if the budget money hadn’t been spent like that?  Would we still be having the kinds of political discussions that we’re having today? I ask myself these pointless questions when I follow the economic news coming out of Washington, D.C.

Quick digression: I’m tired of right-wingers saying that there was no Clinton surplus.  When conservatives argue this, what they’re doing is mixing together the national debt and the federal budget, which are two different things.  The national debt is the total amount of money owed by the federal government, while the federal budget is the cost of programs, services, and obligations run by the government for a given year.  No economist realistically expects the national debt ever to go away entirely.  But when you talk about surpluses and deficits in this context, you are talking about the federal budget, which can indeed run surpluses when the government receives more revenue money in a given year than it spends that year, and some of that money can even be used to pay down the national debt.  So, yes, conservatives, when discussing the federal budget, there was indeed a Clinton surplus.  And I’ll bet that if a budget surplus had appeared during the administration of a Republican president, conservatives wouldn’t be withholding credit to that chief executive by conflating the budget and the debt.  End of digression.

The issue of the U.S. budget deficit has become a constant in the political news media — mostly because it’s a favorite topic of the Republicans in Congress, who keep harping on it.  Another reason: the Baby Boom generation is starting to reach retirement age, placing major pressures on Social Security and Medicare to handle such a large swell of the U.S. population, pressures that a large budget deficit seems unlikely to accommodate.  One proposed remedy for this deficit, because Republicans are loath to raise taxes, is to reduce benefits to Social Security, such as via a “chained CPI.”  So, the current economic debate centers upon diminishing (or if you like, slashing) the social safety net in order to appease the deficit hawks.

However, while the deficit is indeed a long-term problem, it’s manageable in the short run and needn’t dictate immediate economic policies.  Of course, the economic debate that we ought to be having is how best to create more jobs, decrease unemployment, and get the economy humming again — not how to lower the deficit as fast as we can.  So, it’s a tribute (albeit a cynical one) to the Republican Party’s political acumen that they have deflected the country’s economic discourse from jobs to deficits.  However, to most Republicans, cutting taxes and lowering the deficit is indeed a jobs program.  If you just cut taxes on the “job creators,” the argument goes, these employers will redirect every penny that they save on taxes into new jobs and thereby reduce unemployment.  But there’s not much evidence to back up this belief. 

What I’ve read says that the “job creators” will most likely save (sit on) their money, thus not creating any jobs, unless those employers see a rise in demand for their product/service among consumers, and consumer demand hasn’t been as demanding as the economists would like.  Non-conservatives say that the best way to stimulate demand is to put more money directly into the pockets of middle-class consumers — via government programs and projects, for example — so that these purchasers have cash to spend on necessities, which, in turn, puts more money into the pocket of folks selling those necessities, which those folks spend on their necessities, and so on ad infinitum.  But for that to happen, the government would likely need to either raise taxes or increase the deficit, neither of which Republicans will allow. 

Biden says “Great Recession” when he should be saying “deficit,”
but otherwise, the quote is spot-on.

Furthermore, economist Paul Krugman says that the Republican fixation on reducing both taxes and the monetary shortfall isn’t as much about lowering the deficit as it is about the GOP trying to radically shrink the size of government.  According to Krugman, Republicans in Congress believe that if they can starve the government of revenues, it will be forced to jettison some of its offices and functions (preferably, to Republicans, those dealing with the oversight of businesses).  That’s why congressional Republicans won’t countenance raising adequate taxes or revenues: they don’t want a U.S. government as large as it is today to be able to pay for itself.  So, as long as we have a Republican Party that is dedicated more to shrinking the size of government than to shrinking the unemployment numbers, we’re not going to get any legislation that tackles joblessness in any meaningful way.

Anyway, hearing these debates (or, as I think of them, quarrels) about economic policy in Washington makes me wistfully wonder what would have happened if the stars had aligned after the Clinton years to give us an American economy that could indeed handle the impending demands placed on Social Security and Medicare by the retiring Baby Boomers.  And Clinton’s mantra as he left office was to use the surplus to “save Social Security first.”  Of course that bit of advice was ignored: Bush gave away the surplus via tax cuts and pushed for the privatization of Social Security.  If the surplus money were still there, think of the worries that our country would likely be spared.

What are the chances of a surplus still being in government coffers if the Bush tax cuts hadn’t been enacted?  But in order for the Bush tax cuts not to have come about, another president would have needed to be in the White House at the time, and that hypothetical situation brings with it a whole slew of variables.  For instance, what if the U.S. had a president in 2001 who took the CIA brief “Bin Laden Determined to Strike in U.S.” more seriously?  What if, under different leadership, we had a national security system that had been able to detect and arrest the 9/11 hijackers before they boarded their planes?  Or, failing that, what if the necessary Afghanistan invasion had been undertaken without the distraction of an unnecessary foray into Iraq?  In that case, we probably wouldn’t have needed to spend as much money on military operations, which also made up a big chunk of the deficit.  How much money would we have saved then?

Of course, if the budget surplus had survived after the year 2001, the money would have ebbed and flowed along with the country’s economic fortunes.  The Clinton surplus was due to several factors, many of them beyond the President’s control.  Perhaps the biggest contributor was the dot-com boom, whose lucrative new technologies, coupled with Clinton’s tax policies, provided a big boost for the treasury.  But the “dot-com boom” is also known as the “dot-com bubble” because it burst by the end of the Clinton Administration.  So, that stream of revenue wouldn’t be flowing as briskly today.  But perhaps, under different leadership, the government might have funded new technologies that would have made up for the diminishment of dot-com revenues.

Furthermore, I think it’s likely that the financial crisis of 2008, which led to the Great Recession, would have happened anyway, regardless of what party controlled the White House.  Many on the right say that the cause of the recession was due to the government-run Fannie Mae and Freddie Mac following a misguided mandate to extend mortgages to low- and moderate-income borrowers with an uncertain chance of repaying their loans.  But New York Times columnist Joe Nocera calls blaming the financial crisis on Fannie Mae and Freddie Mac “the big lie.”  The true cause of the crisis was the steady weakening of the Glass-Steagall Act (officially known as the Banking Act of 1933) that prohibited commercial banks from engaging in the riskier speculative activities of so-called securities firms.  Judges and politicians began chipping away at the pertinent provisions of Glass-Steagall in the 1970s, culminating in legislation signed by Clinton in 1999 repealing them altogether, thus allowing the banks to gamble more recklessly with their depositors’ money. 

Would having a surplus in the treasury have enabled the U.S. to cope with the 2008 economic crisis better?  I’m not sure.  Even if there had been a different president in office at the time, given current political realities, s/he would have probably been too beholden to the financial industry to rein in the banks’ risky practices.  If we had managed to save the Clinton surplus until 2008, I think that it would have been greatly diminished — or disappeared altogether — because of needing to deal with the effects of legislation signed by Clinton himself. 

But what if, under a different president, the effects of the financial crisis had been offset by other economic policies? 

Yes, these kinds of hypothetical questions lead to falling down interminable rabbit holes: the variables vary too unpredictably.  However, considering these questions drives home an important fact: the deficit that congressional Republicans decry is of their own making.  And it takes a great deal of chutzpah for them to say that the deficit they created is forcing the government to cut programs that — by the sheerest coincidence — the deficit creators don’t like.  Republicans clearly engineered our current unenviable economic predicament, and I don’t trust their budget-cuts-only solutions.  As many Democrats have said, we can’t cut our way to prosperity (and to those who think we can, I would say that there is a difference between prosperity — in other words, a thriving economy — and merely cutting the deficit).  Republicans keep saying that we can’t afford to keep Social Security funded at its current levels.  Maybe what we really can’t afford are more Republican economic policies.

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