Tuesday, July 31, 2012

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 6th 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!

11 comments:

  1. It is an accounting and not a economic thing. Remember the basic sources and uses model in managerial accounting. Sources: Taxes on revenue and uses ...funds applied to stimulating revenue generating business and individuals. Higher taxes do not make business more efficient (except in avoiding them) or grow more. The same applies to consumers who tend to consume less if they have less discretionary funds.
    The D's strategy and business model is to provide funds for the entitled to help them enjoy a prosperous life. That strategy creates dependent people, large urban slums and crime. (ergo-The Great Society) The strategy is to provide a path for upward mobility for the entitled and everyone else. That path includes work, education and some risk taking but moving upward is as much part of the US as the constitution.
    The difference here is sources and uses. The D's provide funds where there is no sustainable return on investment and their source is the rich and upper middle class plus large deficit spending. The R's provide ways to utilize funds that have a sustainable return on investment in the intermediate and long term. Which one works best?
    The answer is in the definition of best. Is it better to grow a country and its entire population or to allow a large part of the population to not really care as long as they are taken care of

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  2. Dear LSD. Good ‘splanation . . . I think you should send it to George Will so that he can crush Krugman with it during Sunday’s a.m. Meet the Press. I’ve always sensed that Clinton’s surpluses resulted from economic growth, somewhat stimulated by lower tax rates, but your data seems to confirm it was more from growth than policy. One aspect of the growth period, though, and not mentioned often – I’ve only read one article about it – pertains to the dot.com bubble driven by a lot of short-term stock transactions and resulting short-term cap gains tax. I think the revenue from this activity/tax really buffered the surplus.

    As to how your blog relates to today’s debate about taxing the rich to generate revenue to “lower” the deficit (gag, it would pay only for two day’s interest, BFD) and/or provide more goo for govomit spending, your blog seems to say that sufficient revenue could be realized to accomplish the same thing just by increasing economic activity – without increasing marginal rates on anybody. The R’s are not making that argument effectively. Quick, get George Will on the line.

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  3. Thanks James and Charles. I agree there are many more angles to the proposed tax increase for millionaires and billionaires. I also purposely didn't say much about the dot com effect on tax revenues. I think most people agree that had a major impact on tax revenues. Thanks for reinforcing that point. Neither point,however, goes very far if one's main objective is using taxes for redistribution of income.

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  4. Greece set up a system to use taxes to redistribute income but only 40% of the people actually paid them. The rest took advantage of shelters or never filed. So the government borrowed a lot to make up the difference until the incoming (sources) revenue was samller than the outgoing (uses) and the redistributed income provided only minor stumulation to a dysfunctional economy. Spain, Ireland and a few others followed this same program and the US is on that track.

    However, the can kickers (CK) also known as our Congress have too many sacred cows...like supporting a military that is larger than the next 17 countries' military combined ....so projects and employment can come to their State. R's & D's vote will always be the same...keep kicking that can and creating distractions so the public does not get alarmed.

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  5. It creeps up on you and then Gotcha!

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  6. Something else that isn't touted by either side is that every single year that Clinton was in office, the national debt increased. How could Clinton claim to be running budget surpluses while the national debt was climbing? The government isn't held to standard accounting principles as is every other business so the solution lies in how the administration calculates the numbers and how the pols spin them. In honesty, every other president has used the same tactics but "BJ" Clinton gets singled out because he, along with a Republican Congress, actually reduced the level of spending more than all of the others.
    Clinton inherited a debt of just over $4.4 trillion as of Sept 30, 1993. As of Sept 30, 2000, it was about $5.6 trillion with a constant increase over the 8 years he was in orifice...sorry, office. So how does the claim of the largest 1-year debt reduction in the history of the country jibe with the guvmint's own data? Well, you would need to be a forensic accountant to finger it out, but it all has to do with public versus private debt and the old "lockbox" called the Social Security Trust Fund.
    In 1985, the SSTF had a surplus of $7.5 billion. 10 years later the surplus was over $60 billion. Just 5 years later, it was $152 billion. What year was that? Oh yeah! 2000 sometimes known as Y2K. Coincidence? I think not. The administration was simply "borrowing" every surplus buck in the box and counting it as "new" income to spend. After all, Alan Greenspan's Commission had demanded just that action. That extra "income" allowed Billy Boy to offset the debt he was racking up in all other areas of the budget.
    Hans F. Seenholz explained it: "Imagine a corporation suffering losses and being deep in debt. In order to boost its stock price and the bonuses of its officers, the corporation quietly borrows funds in the bond market and uses them not only to cover its losses but also to retire some corporate stock and thereby bid up its price. And imagine the management boasting of profits and surpluses. But that's what the Clinton Administration has been doing with alacrity and brazenness. It suffers sizable budget deficits, increasing the national debt by hundreds of billions of dollars, but uses trust funds to meet expenditures and then boasts of surpluses which excites the spending predilection of politicians in both parties." And you can get away with that stuff when your accomplices in the MSM ignore what you're doing.
    Before you all think that I'm quite intelligent, forget it! It came from a book I read recently.

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  7. Fuzzy -- you are what you read? Anyway, I had forgotten about that whole issue and you brought it back vividly! Thanks for the good research.

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  8. Hey Fuzzy:
    Thanks...most of the big corporations are still doing that as well as the government. The Treasury issued the corporate bailout funds to the 5 large banks and within 10 months with no increse in issuing loans and a slumping stock market they issued eannig increases and paid their top guys big bonuses...I assume for figuring out how to work the system.

    The government knows how to work their own system...after all they set it up that way. When a democracy reaches the point that it no longer is a Republic or a Dmocracy for and by the people then these things happen. Our choices are few but we have to demand at the voting booth better more efficient governance and less interference from the government.

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  9. When government throws money at a problem....much as it has done with education and welfare.....the problem never moves toward solution. It gets worse, because, after all, the government will keep shoveling money at it. You give me money with no strings attached and I'm going to do what I want with it.

    If your company violates standard accounting procedures, you go to the pokey. When the government does it, we just re-elect the Bozos.

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  10. A chicken in every pot. Everyone should own a home. All kids should have a 4-year college degree. All elderly should have a continuous non-stop Mediterranean Cruise....What a wonderful world!

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  11. I won't take cruises in the Med. After all, look what happened to the Klinghofer guy. I will take cruises on my meds, though.

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