Clintpublicans Did It. The CLIBUSHTA Urban Legend

Assigning blame is something we all do. It was the other guy who broke the expensive vase. There is nothing new in political candidates claiming success for everything good and shouldering blame for nothing. But the world is not that simple. National political and economic outcomes are surely the composite of many factors manifesting over many time periods.

One specific instance of credit/blame that I hear with regular frequency is the two-part conclusion that (1) President Clinton raised taxes, created a budget surplus, and that was good for the US economy while (2) President Bush lowered taxes, created a budget deficit, and that was bad for the economy. The truth of these statements have current application because some folks would like to make the point that raising taxes on the rich today will reduce the government deficit and would be a good thing for the US economy.

This blog post looks a little deeper at this urban legend about Clinton/Bush/Taxes or what I will refer to below as the CLIBUSHTA. In economics you get rich and famous by writing things on napkins or making up names like stagflation and disintermediation. So let’s see if CLIBUSHTA sticks.

The first thing I would like to note is that Clinton had a majority in both houses of Congress from 1993 to 1995. He was President for eight years from 1993 to 2000.  (see this source for congressional numbers from 1867 to 2009  http://arts.bev.net/roperldavid/politics/congress.htm ). During the remaining six years of his term the Republicans had majorities in both parties. We can label the 1993 legislation that raised top income tax rates to 36% and 39.6% as belonging to Clinton. But upon losing his majority the policy in the remaining years required bipartisan support.

My second point has to do with the behavior of the government budget balance during the Clinton years. The bipartisan Congressional Budget Office did a study (http://www.cbo.gov/publication/41238 ) which examined government budget positions between 1959 and 2008. There you find quarterly figures that show the US budget turning to surplus in the first quarter of 1998 and staying in surplus until the third quarter of 2001. Thus, Clinton-era budgets were in deficit during all the quarters of his first term and the first year of his second term. The budget turns surplus in his 6^th year in office and remains in surplus until the end of Bush’s first year in office.

So it is true that we enjoyed government budget surpluses for three of the last four years of Clinton’s second term in office. The CBO has another set of interesting data that decomposes the actual recorded surplus (or deficit) into two parts:

(1)   the part that is caused by deliberate policy action (called the cyclically adjusted  budget position)

(2)   the part that is caused by the changes in the growth of the economy (called the cyclical budget position)

During the 12 quarters of the Clinton/Bush budget surpluses, the effect of deliberate policy action was shown to be a negligible contributor to the measured surplus. That is, in none of these quarters were Clinton’s tax changes or CLIBUSHTA tax or spending policies a major factor in the surpluses. But the story is even stronger than that. In eight of the quarters, the policy part was contributing to a government deficit. If it had not been for exceptionally strong economic growth in those eight quarters, the budget surpluses would have been deficits. Interpretation – intended policy was to have government deficits but strong economic activity swamped the intentions and created surpluses.

What was going on in those eight quarters? First, the economy was in a long and strong growth cycle that started in March of 1991 and did not end until March of 2001. This 10 year economic expansion started well before Clinton came into office in 2003. It had the unemployment rate falling throughout but it is notable that it went from 4.7% in early 1998 to 3.9% in the final quarter of 2000. During this time period incomes grew rapidly and tax revenues increased despite a host of tax reduction measures taken in Clinton’s second term.

Clinton fans could try to take credit for these eight quarters of government surpluses but it would be a real stretch. Taxing rich people more had very little to do with this tsunami of tax revenue. What about the third year of surpluses? During Clinton’s last year of office (2000) it made sense that policymakers would be less interested in employment and much more worried about inflation. It would make sense as well to move toward surplus-generating policies. And that they did. But even in that year the effects of the economy swamped the policy impact on the surplus. During those four quarters the policy component had less than half the impact of the economy on the surplus.

To summarize, there is very little evidence from either of Clinton’s terms that his policies or those of the CLINTBUSHTA during his terms had much if anything to do with the resulting government budget position. Or to say it another way—there is no evidence here to suggest that taxing the rich creates surpluses and strong economic growth. The truth is just the opposite and more simple – something before Clinton’s Presidency and before Clinton’s tax increase caused economic growth to accelerate and that lead to automatic increases in tax revenue and automatic decreases in government spending. Budget surpluses were caused by growth not by tax policy during the Clinton years.

Without going into a lot of detail one can extrapolate this same point to the dismal economic growth and large deficits of the early Bush years. After the Dot Com bubble burst, we had a recession that began in April of 2001. Bush did not cause that recession in April 2001 any more than Obama caused the recession in 2008. Bush’s budgets quickly went into deficit and it was mostly because of stimulus policy. The recession pushed the unemployment rate from a low of 3.9% to a high of 6.3% by the middle of 2003. Government deficits were automatically increased by the slowing economy but very large tax cuts and spending increases combined to increase measured deficits to the neighborhood of 4% of GDP.

Again the story is the opposite of the urban legend. The latter says that Bush tax cuts caused government deficits and were bad for the economy. But the truth is that during a recession few governments are able to withstand the demands for stimulus policies. Bush was no different. But it is not the tax cuts and the budget deficits that hurt the economy. It was a weak economy that led to tax cuts and higher deficits.

Whether we look at Clinton’s or Bush’s terms – the lesson is the same. The economy caused changes in the taxes and government budget positions. Higher tax rates did not cause surpluses and strong economic growth – lower tax rates did not cause budget deficits and weakened economic growth. To think that higher tax rates on the rich or poor today is a solution to our budget deficits and economic woes is to misunderstand CLIBUSHTA!