Photo: Wikimedia Commons
GOP Senators are united in a desire to see a balanced budget amendment. In an op-ed published yesterday, Senators Olympia Snowe and Jim DeMint made the case for one, while lamenting the fact that one wasn’t passed in the late 90s when the government was running a surplus, not a deficit.You frequently hear from Democrats about how the surplus was “squandered” by the Bush tax cuts. And you hear from the GOP that spending has exploded since then, and if we’d only passed such an amendment, Washington DC wouldn’t be in this gigantic hole.
But here’s what nobody (well, almost nobody) told you about those Bill Clinton budget surpluses. They made the economy worse.
First, let’s make the simple point: They certainly didn’t make the economy better. The late 90s were arguably the peak of the US economy, and since then it’s basically been a long slog down, with one bubble (the housing bubble) interrupting the ride. We can all agree that the surpluses provided the US economy no protection against collapse or crisis or anything like that.
But, beyond that there’s a straight line to be drawn between the government’s lack of leverage, and the expansion of leverage elsewhere.
The lack of government Treasury issuance, for example, lead to huge demand for Fannie and Freddie debt among investors.
And you can see how government debt is mirrored in the private sector.
This chart shows household debt service payments (as a percentage of income) vs. the federal deficit.
As you can see, when the deficit was reduced in the late 90s, it corresponded with the initial spike in household leverage.
That household leverage didn’t decline until government leverage shot up.
Here’s another chart showing something similar.
The change in total liabilities of household nicely mirrors government savings.
As the government saved more, household liability growth accelerated. As government savings collapsed (deficits exploded), households were able to deleverage.
Now let’s talk about causation: Why were the Clinton surpluses associated with an increase in household leverage? It basically comes down to the fact that a surplus basically represents the government sucking money out of the economy through some combination of higher taxes (which Clinton hiked, and which the government got via bubblicious capital gains) and lower spending (welfare reform, etc.). Sure, spending grew under Clinton, but a switch from deficit to surplus by definition means a net decrease in government spending.
Thus for the private sector to keep on growing, it needs to find some way to offset the government drag, and that was done via more leverage.
There is one alternative: You can have private and public sector deleveraging and ongoing growth if you improve your balance of trade, like the US used to have, and which countries like Germany, Japan, Switzerland, and China continue to run. But that only got worse under Clinton, who accelerated the boom in free trade deals that saw more and more advantages given to foreign manufacturing nations.
Bottom line though: The Clinton surpluses didn’t protect us from any calamity, and the attendant boom in private sector leverage is what ultimately smashed the US economy. Why do we want to go back to that?