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“Clintonomics” by John Edward
John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column:
Last month I explained why Reaganomics was a dismal failure. Now I will focus on lessons that Clintonomics have to offer.
President Clinton said, “The era of big government is over.” That was not true. His saying that was a reflection of his political talent, not his economic policies.
What Clinton did achieve was a temporary end to an era of budget deficits. What he accomplished did more for the supply side of the economy than any of the failed supply-side policies of President Reagan.
Economic textbooks describe a “crowding out” effect. If the government runs a large deficit, it might drive up interest rates. Higher rates will discourage investment. Government spending is said to crowd out investment. With today’s low interest rates, crowding out is not a concern.
Some textbooks suggest the possibility of a “crowding in” effect. Investors see the government is willing to spend public funds to stimulate the economy and invest in the future. If they expect the policy will be successful, it will encourage private investment.
We saw some crowding in with President Obama’s stimulus package. However, there is a limit to how much and for how long deficit spending can crowd in investment.
There is evidence that Clintonomics demonstrated a very different crowding in effect. Textbooks seldom discuss it.
When William Clinton took the oath of office the federal budget deficit was $290 billion, or 5 percent of Gross Domestic Product (GDP). It took a while, but by the final years of his Presidency we were running a budget surplus – the federal government was spending less than revenue. We were actually paying down the national debt.
For four years in a row, starting in 1998, the official budget was in surplus. Two of those years were a surplus only because of money going into the social security trust fund. In any case, if you look at the history of federal budgets both before and after, these surpluses were remarkable.
Clearly, something was crowding in investment. In 1992, investment was 13.6 percent of GDP. By 2000, it was up to 17.8 percent. Investment more than doubled during the Clinton administration. As compared to the Reagan-Bush era, worker productivity, corporate profits, and price stability all improved under Clinton.
A mix of fiscal discipline and fiscal reality may have encouraged investors. Investors want the government to manage its budget – in particular to have a long-range plan, and the discipline, to bring it into balance.
However, smart investors also acknowledge the reality that “big government” can help our economy grow. In the short run, it may provide a necessary stimulus. In the long run, no one other than the government will make adequate investments in infrastructure, education, public health, public safety, national security, and environmental stewardship.
In 1992, government spending was 20.1 percent of GDP. By 2000, it was down to 17.4 percent. During those eight years, government spending grew by only 1 percent per year, adjusted for inflation. The President worked with Republicans and Democrats in Congress to reach compromises on spending and taxes.
In 1993, Clinton and Congress agreed to a modest increase in personal income taxes. The top tax rate rose to 39.6 percent. To put that in context, it was 70 percent when Reagan took office.
As a result of the tax increase, government revenue increased significantly. Without the rate hike, there would not have been a budget surplus.
Supply-siders predicted tax increases would slow economic growth. They were wrong.
During the eight years Reagan was in office, Real (adjusted for inflation) GDP grew by 30 percent. During the Clinton administration, it grew by 35 percent. Without the healthy economic growth, there would not have been a budget surplus.
Today we have sluggish economic growth, high unemployment, and a very large budget deficit. The national debt is over 100 percent of GDP. However, it was over 120 percent of GDP after World War II and we recovered nicely. The 1950s and 60’s were decades of excellent economic growth.
We also have companies sitting on about $2 trillion in cash. For now, the government must continue serving as the investor of last resort.
A dramatic reduction in government spending right now would jeopardize the recovery. Trying to balance the budget now could drive us into a recession worse than the one we are still trying to recover from.
However, we need a credible plan to eventually bring the budget into balance. At some point, interest rates will go up and may crowd out investment. We need to crowd in some of that $2 trillion waiting to be invested by demonstrating long run fiscal discipline not seen before or after the Clinton era.
In his Macroeconomics textbook, MIT Professor Olivier Blanchard has the right formula. First, he describes the rationale for crowding in via long run budget discipline. Then he suggests the most effective policy: “backloading the deficit reduction program toward the future, with small cuts today and larger cuts in the future, is more likely to lead to an increase in output.”
Blanchard also advocates revenue increases through broadening the tax base. We spend excessively on low tax rates for the rich and generous tax exemptions for corporations that do little to stimulate investment.
Arguing that we need a long-term plan to balance the budget is not anti-Keynesian. In fact, it is pro-Keynesian because our large national debt limits the flexibility of government to respond, as necessary, to economic crises.
Arguing for a modest tax increase is not a call for bigger government. It is a plea for better government – a more fiscally responsible government.
President Obama is calling for the “Buffet Rule” – a minimum tax for people earning a million dollars or more. According to the White House “For the 98 percent of American families who make less than $250,000, taxes should not go up.” That position should appeal to the Occupy movement but it would only reduce the deficit by about 1 percent.
In a recent Wall Street Journal opinion piece New York Mayor Michael Bloomberg called the Buffet Rule class warfare. Bloomberg suggested the two major parties “should commit to a reasonable and responsible goal – closing the deficit in 10 years.” The goal is a good one. However, Bloomberg’s recommendation that we “allow the Bush tax cuts to expire for all income levels” (my emphasis) is neither reasonable nor responsible.
What would Clinton do? He would triangulate of course.
What should Obama or the next President do? More on that in an upcoming column.
Nice piece!
I would offer increasing revenue by eliminating certain tax breaks as an alternative to raising rates. Applying the Buffet Rule by overlaying a 30% minimum tax rate on the rich appears to be a poor alternative to correcting the tax code that allows unfair tax breaks to those who control lobbying. No one, especially a presidential candidate, should be allowed to increase his wealth by moving investment off-shore. No one, especially a presidential candidate, should be allowed to reap a low tax rate without making a productive contribution to the US economy.
But I would also offer that we need to control spending. Of course, each spending reduction will affect someone, and if done poorly would have an adverse economic effect. One area that should be attacked is how “non-profits” operate beneath the radar of public scrutiny to take significant funds from public spending. As an example, why would a group providing an occupational therapist get paid $150 per hour to work with a patient based on a doctor’s prescription, while only paying the worker about $40 per hour. Somehow the non-profit is allowed to charges a 275% premium for overhead and administration.
JoeS — agreed that there are other strategies that would make more sense, both for the sake of fairness and addressing the nation’s serious budgetary issues.
If we’re looking at regressive taxes, let’s talk about the Social Security payroll tax, for which poorer workers pay a larger share than those making over $110,100. Since SSI payments help to provide a safety net for many people who would otherwise not have it, it’s in the interest of ALL people, but particularly those with the most to lose if society were to spin out of control, to keep it solvent. Somehow, though, once you cross the $110,100 barrier, you no longer take the payroll tax whack for it…the reasoning is that Social Security benefits are limited, and theoretically based on contributions that workers put into the system, but think about it — the people fortunate enough to make more than $110,100 annually would not like the consequences of a society that couldn’t pay for its own safety net. As the owners of property, they have a strong interest in maintaining order.
As for the top marginal tax rate, John Edward points out that we did quite well with 39.6 percent. One thing that’s never made sense to me are the people who say, “If marginal tax rates on income go higher, people just won’t work as much.” Huh? Most people in that top bracket are SALARIED! So if you’re taking home a six-figure annual paycheck that comes from your employer, the time you put in, the effort you exert, etc. has nothing do with the income tax code…a first-year management consultant at one of the major firms is going to work his or her tail off simply as a matter of survival, based on the company’s pyramid model. The top marginal rate could be 10%, 70%, or 90%. It would be irrelevant.
But back to capital gains. JoeS, the reason I believe you’re correct about the Buffett rule not being the right systemic fix is that going after money that’s ALREADY been taxed, and really WOULD be rediverted away from investments if taxed at an even higher rate, is a good recipe to ensure that those silly millionaires would move their money out of things that would yield long-term capital gains taxes (like equity shares in U.S. companies). A salaried worker’s incentives don’t change when the top marginal rate goes from 39.6 to 35 (all it does is worsen the deficit, as we saw with the GWB cut) but a wealthy investor’s behavior really will change when you take away the incentive to steer money towards companies that can innovate, expand, and yes, HIRE people. And hiring new workers is the best anti-poverty program I’ve ever heard of…
Even from a balancing-the-ledger point of view, the $40b+ that the Buffett Rule would yield for the Treasury over the next ten years is maybe a drop in the bucket, never mind the deleterious side effects for everyone else.
We have some serious issues to face in terms of the federal budget, and it just doesn’t seem like either party is really willing to stand up and face any of the tough truths about what will need to happen. Instead, we get worthless side-shows from the left (Buffett Rule) and demonizing/fear-mongering from the right (claiming that Pentagon cuts will hurt the troops, when in fact they won’t if they’re done right, because most of that massive chunk of the budget has nothing to do with actual troops).
Oh, and good call about the ‘non-profits.’ We hear so much griping about welfare recipients who barely eke it out at the edge of subsistence, but what about the people who really waste taxpayer dollars lavishly for no return back to the people? (I’d point to the recent Rose Kennedy Greenway revelations as an example). Who’s the bigger threat? The person collecting $1k/month in federal benefits or the person planning the GSA conference to throw away money on a scale that’s an entire order of magnitude bigger than that?
Let me pick up on two points, made by Greg. First, I’ve heard many hourly, blue collar workers state plainly, they will not “Work for Uncle Sam.” Meaning, they refuse to work extra OT for wages that push them into a tax bracket they find slanted towards the goverments favor. I mention this because, whoever is framing this discussing may know what Greg knows. Salaried workers will push to climb the ladder. Plus, they know that many hourly workers may not. Thus, a meme is created to dupe the understanding of a critical issue.
Second, again on messaging. I’m happy to see that Greg shares my sentiment, “Don’t punch down.” And, I suppose, maybe a little “Poverty is big busines.”
Worked in factories for nearly fifteen years and represents workers as a union business agent and never, ever heard anyone I worked with utter anything close to not wanting to work overtime or more hours because of taxes or some such. That’s the meme here along with the continuing saga of “poverty is big business’. This might work if it was qualified to refer specifically to the people at the top of public agencies making massive salaries at the expense of the people they are supposed to be helping. Otherwise, it can be read as an attack on anyone who needs assistance of one sort or another during their life span.