Democrats, like President Obama, persistent invoke the halcyon Clinton budget surpluses as some kind of Holy Grail for the country. But the mythical “virtue” of the Clinton budget surpluses is one of those unfortunate pieces of misinterpreted history that continues to afflict the Democrats in regard to their conduct of fiscal policy. Implicit in this argument is the belief that somehow balanced budgets are the norm, that President Clinton’s responsible stewardship righted the fiscal ship of state, after it has been left close to “insolvent” by the irresponsible legacy of Reagan’s supply-side economic adventurism.
Well, let’s look at the history first: for the past 82 years, the US government’s budget has been in deficit of varying proportions of GDP over 80 per cent of the time. There is nothing insidious or inherently sinister about these deficits. Each time the government tried to push its budget into surplus, a major recession followed which forced the budget via the automatic stabilizers back into deficit, ultimately helping to put a floor on demand and prevent a recurrence of the Great Depression.
During the Clinton years, everybody – Democrats and Republicans alike – applauded these surpluses because it meant that the government’s outstanding debt was being reduced. But Professor Fullwiler’s chart confirms that as the government budget moved to surplus during the latter years of the Clinton Presidency, the private sector’s deficit correspondingly grew larger: It was the mirror image to the budget surplus plus the current account deficit. In other words, this chart illustrates that the budget surplus meant by identity that the private sector was running a deficit.
Why is that? It is because budget surpluses suck income and wealth out of the private sector. As the budget surpluses grew, households and firms were going ever farther into debt, and they were losing their net wealth of government bonds. Even when the government went back into deficit, it was insufficient to offset the cumulative effect of huge private debt accumulation and rising trade deficits, both of which ultimately laid the foundations for the Great Financial Crash of 2008.
I’ll be the first to admit I’m no econonumberologist but my understanding of Keynesian Economics was that in bad times the government should run up deficits (borrow) and in good times pay back those loans. If I’m reading this Auerback fella right then government is supposed to borrow in bad times and never pay it back.
Maybe somebody else can explain it to me.