How Did Fiscal Policy Get Turned Upside Down?

September 4th, 2013 at 11:41 am

[I’m finishing a chapter on how fiscal policy went wrong, from which I’ve been spinning off a few posts.  Here’s one on the (d)evolution of how policy makers think about fiscal policy.  What can the recent history of ideas teach us about the damaging ascent of austerity and descent of Keynesian countercyclical policy?]

*****

I identify three reasons why fiscal policy became so backwards in recent years.  First, a strategy by Democrats to block the GW Bush tax cuts morphed from strategy to ideology.  Second, a misunderstanding of the Clinton surpluses in ways explained below.  And third, the use of deficit fear-mongering to achieve the goal of significantly shrinking the government sector.

During the early years of the GW Bush administration, the President proposed and Congress passed two tax-cut packages that quite sharply lowered the revenues flowing to the Treasury.  During those debates, opponents of the cuts raised their negative impact on deficits and debt as a major concern.  Such concerns proved to be justified.  As Ruffing and Friedman show (2013), instead of its actual slowly rising path, the debt ratio would have been falling in the latter 2000s but for the Bush tax cuts (war spending played a much smaller role).  In my terminology, GW Bush fiscal policy was that of an SD (structural dove), adding to the debt ratio throughout the expansion of the 2000s.

Many who were making those anti-tax-cut arguments cited the Clinton years as an instructive counter-example.  The lesson of those years, they argued, was that by increasing taxes and restraining spending, the Clinton budgets both led to surpluses and assuaged bond markets leading to lowering borrowing costs, more investment, and faster growth. In fact, while fiscal policy in Clinton’s first budget did lower projected deficits, as discussed above [earlier in the paper I point out that if you track the swing from deficit to surplus from 1993-2000, Clinton fiscal policies explain one-third of the change; even once these changes were in the baseline, in 1996, CBO still projected deficits a few years later, when in fact the budget went into surplus, so Clinton fiscal policy cannot get credit for that part of the swing], economic growth was far the larger factor (the fact that much of this growth was a function of a dot.com bubble is a separate issue).

Together, this line of attack against the Bush tax cuts in tandem with the over-emphasis on Clinton fiscal policy as the factor that led to surpluses, raised the budget deficit to a new level in the national debate.  Deficit hawkish pundits, editorial pages, and policy makers knew two things: Clinton raised taxes, cut spending, and balanced the budget; Bush cut taxes, failed to restrain spending, and added to the debt ratio.

Again, reality was more complex.  Economic growth was the major factor behind the Clinton surpluses, and while GW Bush’s tax cuts clearly added to the deficit and debt, even under his quite profligate fiscal policy, the deficit-to-GDP ratio fell to about 1% in 2007 (below primary balance).  To be clear, this is no endorsement of his structural dovishness.  That was the last year of that business cycle expansion, and as I argue later in the paper, it’s important to get the debt ratio on a downward path much sooner than that.  But the collision of these two different approaches to fiscal policy in two back-to-back decades helped to construct a conventional wisdom about budget deficits as a national scourge that had more to do with cursory observation than economic analysis.

Another important factor, perhaps the most consequential, in the evolution of these wrong-headed ideas was the partisan ideology that government should be much smaller as a share of the economy.  For conservatives who shared this vision, elevating the issue of the budget deficit as a major national problem was and remains a highly effective strategy.  If they could convince the public and their representatives that deficits had to be reduced no matter what, than cutting the federal budget should be a short step away.

Of course, at least in terms of arithmetic, it is not at all obvious that balancing budgets requires spending cuts; it could also be achieved by raising taxes.  So, part of the conservative strategy has been to take higher tax revenues off the table.  Similarly, some—though by no means all—in the conservative caucus aim to protect defense spending.  That leaves the non-defense discretionary budget and the mandatory entitlement programs, and these are in fact the targets of conservatives who continue to cite the threat of budget deficits—even as they fall sharply.

An illuminating set of documents to see these dynamics in action are the recent budgets passed by House Republicans.  These budgets have proposed to cut taxes sharply for those at the top of the income scale, slash food support and Medicaid, turn Medicare into a voucher program, and cut non-defense discretionary spending to historically unforeseen low levels.

This analysis of the House 2010 budget, from budget expert Robert Greenstein, provides some extensive detail of this goal of shrinking government (Greenstein is referring to CBO analysis of the House budget authored by Rep. Paul Ryan, a noted deficit hawk).

“The CBO report, prepared at Chairman Ryan’s request, shows that Ryan’s budget path would shrink federal expenditures for everything other than Social Security, Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and interest payments to just 3¾ percent of the gross domestic product (GDP) by 2050.  Since, as CBO notes, “spending for defense alone has not been lower than 3 percent of GDP in any year [since World War II]” and Ryan seeks a high level of defense spending — he increases defense funding by $228 billion over the next ten years above the pre-sequestration baseline — the rest of government would largely have to disappear.  That includes everything from veterans’ programs to medical and scientific research, highways, education, nearly all programs for low-income families and individuals other than Medicaid, national parks, border patrols, protection of food safety and the water supply, law enforcement, and the like.  (In the same vein, CBO also notes that spending for everything other than Social Security, Medicare, Medicaid, and interest “has exceeded 8 percent of GDP in every year since World War II.”

Another interesting example comes from a recent policy suggestion by conservative economists Glenn Hubbard and Tim Kane.  They begin by citing an Admiral from the Joint Chiefs of Staff claiming that the national debt is the “single biggest threat to our national security.”  They then call for an amendment to the US Constitution that they call a balanced budget amendment but is really a spending cap: “Congress shall spend no more in the current year than it collected, on average, over the previous seven years.”

Though they explicitly note that Congress can override the amendment in “national emergencies,” such a rule seems clearly motivated by the desire to reduce the size of government and preclude Keynesian measures in downturn.

In sum, the over-interpretation of fiscal rectitude in the Clinton years, the “structural dovishness” of the GW Bush years, and the ideological drive to shrink the size of government have contributed to our current predicament, where despite evidence to the contrary, austerity measures dominate fiscal policy.

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19 comments in reply to "How Did Fiscal Policy Get Turned Upside Down?"

  1. smith says:

    No, no, and no.
    Clintonomics, anti-Bushism, and ideology are not the answers.

    a) The important part of interpreting the desire to replay 1992 is left out, namely that Summers wasn’t looking back at the Rubin era and saying it worked (or he would have seen what you see). Rather he believed in the ideology first and foremost (as documented in the Dec 2008 memo), it was personal, meaning how Rubinistas bolstered the economy through their actions gave themselves importance too, and it also actually does help moneyed interests (how can you leave that out?)
    b) The Democrats have never made the Bush tax cuts a primary issue. When they could have in 2010, they didn’t. Even 2012 was a, “aw shucks just let the very rich kick in a tiny bit more” and then they caved on the $250,000 threshold. They apologize for repealing cuts. They do it to save crucial spending programs. But also congressman and contributors and 20% who run country like the tax cuts, they benefit (how can you leave that out?)
    c) Ideology has very little to do with the real reason Republicans focus on deficits, ideology is a smoke screen. Money and power are what it’s about. Be anti-anything-Democrat to maintain power, and be anti-anything that takes money from the rich and gives it to the poor. Use the ideology to convince the poor (and yourself) of some noble cause.

    Taking money and self-interest out of the equation, and substituting history, politics, and ideology instead, is to ignore the obvious and more simple reasons for tolerating high unemployment. You can not win a debate this way.


    • Jared Bernstein says:

      Yes, re your point c–that’s an important correction.


      • Perplexed says:

        Not so fast! Its both. The modern republican party is a coalition of three major groups: the wealthy (and those that believe they will soon be), Anarchists (or Libertarians or whatever label you choose, and the religious right.) Its a 3-legged stool that wouldn’t stand without the other two (and even then its having trouble at the national level). Have you read Suskinds book on Paul O’Neil and his notes on his conversations with Greenspan surrounding the surpluses? Its pretty relevant to this “chapter.”

        As you point out: “Another important factor, perhaps the most consequential, in the evolution of these wrong-headed ideas was the partisan ideology that government should be much smaller as a share of the economy. For conservatives who shared this vision, elevating the issue of the budget deficit as a major national problem was and remains a highly effective strategy. If they could convince the public and their representatives that deficits had to be reduced no matter what, than cutting the federal budget should be a short step away.”

        It is not “conservatives” who share this vision, it is anarchists who share this vision. I posted this on this site back in May (but can’t find the link now):

        I watched the Up with Steve Kornacki Show over the weekend and noticed again all of the quizzical looks and head scratching when trying to understand how the “conservatives” or “right wing Republicans,” or “Tea Partiers” think these problems could possibly be solved if they aren’t “willing to compromise and work towards solutions.” How would they govern if given the chance? I couldn’t help but wonder if all of our emphasis on STEM education hasn’t completely displaced other, equally important subjects. I found myself wondering if its really possible that our media pundits, our politicians, and our advisors to POTUS don’t even know who the Anarchists (particularly the late 19th, early 20th century Russian Anarchists) were? What their ideologies were (and still are)? Is it possible that our President and other members of Congress have been “negotiating” for years now without knowing what drives those on the other side of the table? The more I thought about, the more it seemed like the only plausible explanation. How could it be that none of their political opponents have ever brought it up? No one in the media has questioned the links? Does no one understand that the philosophy of the Libertarians IS the philosophy of the Anarchists (with a couple of relatively minor changes e.g. they’re now in favor of inherited wealth)? Have the Libertarians really succeeded in providing a “Trojan Horse” to conceal the identity of the Anarchists inside and no one notices? Have the media and opposing candidates not explained to voters that they are voting for Anarchists because they don’t understand it? Do they no longer even know any historians knowledgeable of the subject they might be able to ask?

        Do people really believe that Ayn Rand being born in St. Petersburg in 1905 and living there until the Revolution in 1917, and rise of Russian Anarchism to its peak before the revolution are just coincidental unconnected events? Do people really not understand that when Libertarians speak of “liberty” it has quite a different meaning than what most of us understand as “democratic liberties?” When Anarchists (or Libertarians or whatever you “re-brand” them as) speak of liberty they mean liberty from democracy (or socialism, or monarchy, or dictatorship, or communism), or any other form of government. They have no ideas of “how to govern” because the primary foundational belief is that the solution is NOT to govern! Democracy and Anarchism are incompatible philosophies as each precludes the possibility of the other. If you understand 20th Century Russian Anarchism, the mystery of the Republican negotiating strategy evaporates. The remaining mystery is how do you get a degree in journalism without knowing anything about what is relatively recent history?

        Read this for quick primer on what underlies Rand’s mythical world under the philosophies of Anarchism: http://dwardmac.pitzer.edu/Anarchist_Archives/bakunin/stateless.html

        And read this for a quick summary of some of the “flavors” of Russian Anarchism (from the Black Banner (Chernoye Znamya) group to the non-violent, non-resistant Tolstoyism.

        http://dwardmac.pitzer.edu/Anarchist_Archives/worldwidemovements/anarchisminrussia.html

        While Ayn Rand might provide some entertaining fiction, if you really want to understand the Paul Ryan’s, Eric Cantor’s, Ron & Rand Paul’s, and Mitch McConnell’s of the world, you need to understand Bakunin, Tolstoy, Znamya, Bakunin, Kropotkin, Proudhon, Malatesta and Reclus et.al. Do you really think Greenspan’s “shock” when he discovered that financial markets really do need to be regulated was a result of his extensive training in economics? And if you want to understand either McConnell’s legislative strategy or Paul Ryan’s budget calculations, you need to understand Machiavelli as well.

        Under the ruse of the “Randian” philosophy, Anarchism in the U.S. has already had much greater political success and impact than it ever did in Russia. “Shrinking government,” “drowning the government,” and “starving the beast” are all Anarchist objectives. Greenspan was the chairman of the FED, McConnell, Ryan, Cantor, and both Pauls are elected members of Congress, Mitt Romney came dangerously close to being elected President. Isn’t it about time we at least brought this out into the open so Americans can decide if what they really want is Anarchism? Would Americans really be voting for “Tea Party Conservatives” if they understood that they were voting for Anarchy INSTEAD of Democracy? Maybe it should be a conscious choice instead of a deception? Our ability to govern democratically has been brought to a practical standstill; is it just a coincidence that this is the primary objective of Anarchists? If you believe that, you don’t understand what you’re up against.

        The history of ideas didn’t start with with the settlement of Jamestown, and its not limited to the U.S. borders. We really need to get off the island once in a while.

        Sorry about the length.


        • smith says:

          While the tea party has rattled establishment Republicans, they don’t rule. In the 2012 election Republicans nominated the most liberal of all the possible candidates, and from a large liberal northeastern state. He won 47% of the vote. Mostly, he was hurt by being too conservative, pandering too much to the conservative wing, and picking too conservative a running mate (and running an inept campaign). Unlike 1980, 1984, or 1964, conservatives were hardly enthusiastic about the choice. Many political analysts feel the Tea Party and the like cost Republicans control of the Senate.

          The tea party may attract attention and press, but they’re not controlling the nomination process or congressional leadership. At some point someone is liable to overstep their bounds, beyond the mere resurrection of Milton Friedman, perhaps over honoring international sanctions against chemical weapons, maybe challenging the army, and someone will ask “Have you no decency?”

          Meanwhile, Democrats would benefit greatly from an actual Tea Party ascendancy in the GOP.

          Republicans consistently favor large defense programs, budget deficits, and activist conservative justices who bend the constitution to favor big business and increased regulation of commerce and liberty when it suits their purpose. Rational adherence to any ideology? Not so much. It’s mostly power and money.


          • Perplexed says:

            You’ll not get an argument from me that the “monied interests” are not a hugely important part of the equation and likely occupy “all three seats in the cockpit,” but you are grossly overstating their numbers at 20%. Our wealth GINI is now .87 and growing (when it gets to 1.0, one person will own it all – were not that far away), which means that nearly ALL of the money is held by the top 5%, and most of that is held by the top 1%. They influence elections by using their wealth to control who is eligible to run, not by their numbers at the ballot box (they don’t even all vote republican so their ballot box influence is even less than their numbers might suggest.) By all means, they’re an important an necessary “leg” of the stool. The religious fanatics are just camping out with whoever they believe might “throw them a bone,” and many of them are “believers” in the anarchist faith as well (all though they probably have no idea that this is what the faith is actually called), so there’s plenty of overlap. But, as Jared so aptly points out: “Another important factor, perhaps the most consequential, in the evolution of these wrong-headed ideas was the partisan ideology that government should be much smaller as a share of the economy.” But he mis-identifies it as “partisan ideology,” when what it really is is “anarchist ideology.” The “party” only adopts it because it can’t stand on only two legs and this is where the real numbers are. The monied interests and religious fanatics can’t get anywhere near the 47% #’s without the anarchists, all three legs of the stool need each other and know it.

            My point is that many (probably most) of the “anarchists” have no idea whatsoever that what they are voting for is anarchism and that its incompatible with democracy. Having no one rule and having the majority rule is a paradox that is not resolvable by compromise. That’s why its been hidden inside the “Trojan Horse” that is called “Libertarianism,” its simply a “new and improved” version of anarchism that is little more than a re-branding of the same old thing.

            If, as you suggest, you want to win the debate, you need to inform those voting for anarchism by another name, that they are in fact voting for anarchism, and that its incompatible with democracy. There are likely to be considerable numbers of them that would choose not to vote for something that’s fundamentally incompatible with democracy. So you can prevent corruption of elections by having public only financing of campaigns (they’ll cost the same % of GNP either way), and you can inform people that what they are voting for is called “anarchism” and let them read up on it and see if they think its a better idea than democracy. Or you can continue to live in what is essentially a DINO. But as long as people (like Paul Krugman for instance) insist on mocking the fictional “Randian” philosophy, people will probably not realize its really non-fiction, and its called anarchism. And he calls himself a history buff?


        • Widgetmaker says:

          Good comments, Perplexed. Lot of food for thought. So today’s libertarians = anarchists? I’ve always felt that in my bones, but couldn’t define it so well. The teabaggers remind me of the hippies, disenchanted, protesting simply for the visceral thrill of rebelliousness, railing against the system, and proposing nothing constructive as an alternative. They don’t govern, they emote. So let’s recognize it for what it is – Anarchism.

          And if you are an elected official in a Republican district and want to maintain your office you would be a fool to ignore them.


          • Perplexed says:

            Other than abandoning the idea that inheritances should not be permitted, and the church should be abolished (the other two legs of the stool.) I don’t find any significant differences that would impact supporters of democracy. Bakunin lays out his version here (before Ayne Rand was born – he died in 1876), see what you think; recognize any of these ideologies? http://dwardmac.pitzer.edu/Anarchist_Archives/bakunin/stateless.html

            Rand didn’t make this stuff up; it was very likely the dinner conversation at her home when growing up (it wasn’t the proletariat that move to the Crimean Peninsula to finish high school when the revolution started). Rand simply repackaged and sold it to a group of people on the other side of the ocean that were so insular they couldn’t be bothered with studying history. (She assessed her “target market” with uncanny accuracy).

            The origins of the “partisan ideology” that Jared speaks of can be found repeatedly in Bakunin’s writings.

            “So let’s recognize it for what it is – Anarchism.

            And if you are an elected official in a Republican district and want to maintain your office you would be a fool to ignore them.


          • Perplexed says:

            … “you’d be a fool to ignore them”

            and conversely, if you ignored them, its highly unlikely you’d be “an elected official in a Republican district.”

            I don’t see how we get past it if we don’t start to have some serious dialogue about it; and the anarchists are counting on that not happening as it benefits them tremendously.

            Thanks for your comment.


          • Perplexed says:

            A point of clarification. Your reference to “hippies” got me to thinking about the degree to which we “blur” together very different definitions (and meanings) of anarchism and anarchists, and how these differing definitions impede the understanding of what the Anarchists were, and are, really about (see here, the distinctions are highly relevant http://www.merriam-webster.com/dictionary/anarchy). The Anarchists are really not about “anarchy” in the sense of 1b (“b : a state of lawlessness or political disorder due to the absence of governmental authority”), or 2b (“b : absence of order : disorder (http://www.merriam-webster.com/dictionary/disorder) <not manicured plots but a wild anarchy of nature — Israel Shenker"). Unlike the Chicago Police, they are not "there to preserve disorder" as Mayor Richard J. Daley so "aptly" put it many years ago. What the Anarchists were, and are about is 1a ("a : absence of government "), 2a ("a : absence or denial of any authority or established order"), and probably most importantly 1c (c : a utopian (http://www.merriam-webster.com/dictionary/utopian1) society of individuals who enjoy complete freedom without government). These are the distinctions that make Anarchism incompatible with democracy. Democracy is a form of rule, a form of government. Anarchists deny that its helpful, or necessary, to have a "governing body." They believe that any attempts to govern are destructive to society. In their "utopian society" of "free individuals," there would be no need for a small "minority" of people to govern (any of this sounding familiar Randians?) To Anarchists (or Libertarians or whatever other label you choose), "liberty" means "liberty from "authority," from "being governed," from you, the majority, "governing," or "restricting in any way" their "freedoms." So democracy (rule by the majority) is entirely incompatible with Anarchy ("denial of any authority or established order"), and its also incompatible with "we are all in this together" and that some "authority" should intervene to prevent unjust results. In an Anarchistic utopia, unjust results don't happen, and "free individuals" will mobilize and come to the aid of victims of disease or disasters without any "authority" intervening to see that it gets done. This is what gets mixed into the "Randian cool-aid."

            So while some Anarchists (def. 2a) thought the use of anarchy (def. 2b) was justified in overthrowing existing governments, many (likely most) did not approve of this (see http://dwardmac.pitzer.edu/Anarchist_Archives/worldwidemovements/anarchisminrussia.html) "Tee baggers" are very much like the the more radical sects of Anarchists (although so far nowhere near as violent as the most radical sects were in pre-revolution Russia), whereas most Republicans (and a lot of "Clinton Democrats,") support these anarchist views (although I have my doubts that a lot of them really know the origins of these views and would re-think their support if they did).

            I don't really see "hippies" as meeting either definition, and I don't think its really about "the disenchanted, protesting simply for the visceral thrill of rebelliousness," (for most anyway); I think for many, its motivated by there sense of frustration that nothing is being done and if they really understood they were supporting anarchism, they would understand that their support of these views is support of the Anarchist's objectives that "nothing get done" by the government.

            We should really realize by now that whenever we think we are seeing something "new" the odds are very, very high that what we're really "seeing" is that we haven't studied history very well and that it might be a good idea to check that possibility out prior to "jumping on the bandwagon." Maybe it didn't work out so well last time around and maybe we could learn something from that? More utopian visions I would assert; and the odds would be highly in my favor.


      • Dave says:

        Yes, point c was correct. But we need to start getting smarter about distinguishing between the players here:

        Many voters are in fact fooled by false ideology. We know the leaders of this party aren’t believers in the ideology their push, but the voters almost always fall for it.

        So yes, the leaders (the drones) and their pilots (monied interests) are only interested in the money. But the propaganda pamphlets they drop onto the voters are actually pretty effective. When talking to voters, you have to realize that.


        • smith says:

          Points a) and b) argue that Democratic leaders want to hold the deficit down because they really believe it’s important for the economy (albeit, of the rich) and they love tax cuts for the rich. Fortunately they are able to blame Republicans for tax cuts for the rich. They are also to blame holding down the deficit on the Republicans. But well off Democrats benefit just as much as well off Republicans by keeping tax cuts and throttling government expenditures (you can’t have one without the other). They are equally unaffected or benefited by high unemployment (lower labor costs, higher profits). I’m not saying there’s no difference. Democrats want to maintain the status quo, Republicans want to make things worse.

          Ideology, shmideology. If unemployment was down, and business was prospering, Democrats would win. That’s how you win over the opposition. Not with debating points, but with success. You lose by screwing up (see letting Lehman Bro. collapse, or stimulus too small).

          A reform Democrat or Republican runs against corporate welfare, government waste, rich out of touch politicians with their hands out, and promotes Eisenhower tax rates, Reagan’s minimum wage, and Teddy Roosevelt’s wilderness protection, FDA, and trust busting. Nobody does this because of money. Need to point that out.


          • Dave says:

            Yes, money affects the Democratic party almost as much as the Republican party.

            But that doesn’t account for Obama’s economic position. Obama has been pretty enamored by the Republican propaganda pamphlets.

            They are powerful, and everyone knows by know, Obama is not a powerful mind. He means well but he’s not emotionally strong enough to realize the actual problems.

            The Clintons are strong enough as a pair, but do the realize how much they have been affected? I’m not sure. We have to hope for the best if we elect Hillary. She’s a corporatist. Will she get over it? Not sure.


          • smith says:

            Krugman writes: “Right now, Washington seems divided between Republicans who denounce any kind of government action — who insist that all the policies and programs that mitigated the crisis actually made it worse — and Obama loyalists who insist that they did a great job because the world didn’t totally melt down.”
            http://www.nytimes.com/2013/09/06/opinion/krugman-years-of-tragic-waste.html

            Echos my statement:
            “Democrats want to maintain the status quo, Republicans want to make things worse.”

            That seems obvious to me, but please show me more examples of economic blogs emphasizing that point…


      • EC says:

        It’s really simpler than all this discussion of anarchism, libertarian or social, etc., etc.

        Since Nixon, the Republican Party has been a coalition of the rich and the rednecks, the former needing the latter’s votes. The rich want tax cuts and will leave it at that and accept deficits; the rednecks want redistribution to social groups they despise to end, and at least the tea party faction among them has finally figured out all they have been getting from the rich in that regard has been rhetoric: not actual spending cuts; hence the breakdown of the coalition.

        Rednecks are approaching the Republicans’ demographic problem with winning elections by gerrymandering and voter disqualification, while the rich are open to expanding the tent, which entails dumping the rednecks, just as the Democrats did 40 years ago.


  2. Peter K. says:

    This is right on the money.

    “The lesson of those years, they argued, was that by increasing taxes and restraining spending, the Clinton budgets both led to surpluses and assuaged bond markets leading to lowering borrowing costs, more investment, and faster growth.”

    I believe this is DeLong’s view among others. I’d add that they engaged in deficit reduction so that Greenspan wouldn’t raise rates prematurely. Clinton scrapped his middle class spending bill after the election after he was convinced by Rubin and Greenspan that the bond market (I think it’s Greenspan) would help growth more in response to deficit reduction. Greenspan did allow non-inflationary growth in the later 90s despite calls for him to raise rates.

    Other things to mention are that candidate Ross Perot helped focus people on the deficit and Clinton had to deal with Gingrich and a Republican Congress.

    It was disengenuous for Greenspan to force deficit reduction on Clinton in exchange for not slowing growth, and then to turn around and endorse the Bush tax cuts which would add to the deficit. Would tax cuts upset the bond market? What it is is conservative demand management policy: cut non-defense spending to slow the economy, reduce the deficit and prevent inflation, cut taxes to give the economy a boost no matter the effects on the budget.


  3. George N. Wells says:

    The Clinton surplus was not simply a product of a well-crafted economic policy, it was also the product of a bubble-economy, specifically the dot.com bubble. As a hiring manager in a tech company during those days I was hiring like crazy and a lot of the people who sat across from me did not have half the qualifications I would have liked to have but unemployment was unusually low. Therefore, both income and FICA receipts were way up and the government coffers grew rapidly the largest of them being the FICA funded Social Security Trust Fund which had seen the FICA rates double under Reagan. Since this is an asset of the federal budget things looked great! Unfortunately the dot.com bubble burst and the employed numbers shrank, the first being the under-qualified workers.

    Today, in my opinion, we are in a totally different market where the only jobs without global competition are the In-Person-Service and Executive positions. Everything else is being driven to the lowest wage on the planet thanks, in large measure, to the global telecommunications network that allows anyone who does not have to be in a particular place at a fixed local time to compete for the available work.


  4. Tom in MN says:

    “national debt is the “single biggest threat to our national security.” ” could be restated that citizens owning Treasury bonds is …

    Which makes it clear this is nonsense. War bonds? Hello?


  5. Dave says:

    “mandatory entitlement programs”

    I think we need to change the language we used to talk about Social Security and Medicare. These should be called earned benefits. Medicaid can be called an entitlement.

    I shall have to read this book when it is released. I was also happy today with Dean Baker’s HuffPost blog today regarding the MBS taper. And I did say, wordup2that there.

    I should like to read any analysis you have to offer on the .com bubble. I always knew the liberal talking points about Clinton economics were overstated, but thank you for pointing out just how much: apparently 66%.

    Much to the chagrin of liberal economists, I’ve never been particularly impressed with the Clinton economic track record. In political conversations, as opposed to economic conversations, it is just so tempting to show that record and claim it was the result of whatever…

    I have a strong suspicion that the .com bust and the housing bubble were 2 peas in a larger savings-craving structural shift. I suspect that a lot of money out there designated as savings can be coaxed into investing, but only if the returns look unearthly as they did during the .com bubble.


  6. bakho says:

    Adam Smith noted long ago that the Wealth of Nations depends on division of labor. In the 1990s, the internet (Al Gore was its #1 Patron) created a whole new division of labort. As this division expanded, it created new jobs, expanded GDP and created wealth. To keep an economy from overheating, new investments must be dampened. This can be done by monetary policy of making money more expensive to borrow, or by fiscal policy of taxing to pay down debt and leaving less profit to reinvest, IOW, Keynesian countercyclical policy. Deficit spend in recession and pay down debt during expansions. Clinton era also saw the “Peace Dividend” started under GHW Bush blossom. Money that was wasted on defense was invested in the domestic economy. It’s not that Clinton policies created the growth, Clinton policies properly managed economic policy in an era of growth. Clinton policies focused on jobs, low unemployment, making work pay and a job for everyone who wants one. That focus was abandoned by Bush.

    Once the Tech Bubble burst, Bush failed to nurture growth of any sustainable New Divisions of Labor. Bush shifted spending from domestic goods and services to defense and HS and spent huge amounts in Iraq and Afghanistan. Bush refused to nurture the tech industry and harmed it by privatizing functions that should have been public. The rent collections by Malefactors of Great Wealth have stymied growth. Bush also restricted immigration in the wake of 9-11 so that the US slowed the growth of new business startups in the US by the best and brightest from around the world. The Best and Brightest and their startups settled elsewhere.

    For stimulus, Bush pushed Tax Cuts for the Wealthy and Greenspan pushed monetary policy to its limit. Greenspan, with Bush as Cheerleader in Chief, created the housing bubble as a way to channel investment into the domestic economy. It worked until the bubble burst. However, the Tax Cuts failed to produce domestic jobs and allow construction jobs to shift to a new Division of labor. Globalization has led to a change in the effects of tax cuts on a domestic economy. Before globalization, tax cuts would translate into increased saving or increased domestic investment. The Bush tax cuts, did little to stimulate the domestic US economy because many of the most profitable investments were overseas. Rather than investing in the domestic economy, much of the Bush tax cuts “leaked” overseas and stimulated foreign economies while domestically, we had a “jobless recovery”. The Bush tax cuts accelerated the offshoring of domestic jobs.

    The unemployment crises we currently face requires BigG spending on domestic goods, services and labor. This is basic Keynesian countercyclical policy. Conservatives of all stripes hate Keynesian policies and the New Deal because they distribute wealth more equally rather than allowing capture by the Malefactors of Great Wealth. The Malefactors of Great Wealth have made progress in rolling back New Deal programs or at least halting their expansion since 1980. They refuse to give back any gains in social program cuts, no matter how much it hurts the domestic economy. As much as possible, money is channeled away from public institutions and instead “privatized” in ways that allow the Malefactors (and patrons of politicians) of Great Wealth to pocket money that was intended for domestic investment or domestic labor.

    The US lacks a coherent labor policy. A coherent labor policy would lead to better fiscal policy. The Malefactors of Great Wealth want cheap labor. Their lobbyists buy politicians to ensure that labor stays cheap. There have been no raises in minimum wage and little effort to reach full employment. Obama quit talking about jobs and full employment and switched to deficit reduction before the economy returned to full employment at a time when unemployment was higher than it had been since the early 1990s. Until we formulate a coherent labor policy to balance the obsession over balance budget, we will make little progress. The conversation should be about jobs, but it is not and has not been since 2000.
    -jonny bakho


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