Because I am an equal opportunity political hater – I bring you the counterargument of the Paul Ryan story. It’s unfortunate that I even have to write a story like this, but our world has become so divided down party lines that no one appears to be able to filter their economics without first deciding which side of the party line they stand on. It’s no longer about what’s best for America, but what’s best for the political party you back. But this is a good opportunity to lift the veil from some of the myths that surround the nasty politics of economics.
Many have accused me of taking a political stance when writing about the economy and Paul Ryan specifically. That’s simply not true. I often point to the Clinton years as clear evidence that this is not about politics to me, but pure economics. What do the Clinton years have anything to do with our current predicament? Let’s take a look.
The 1990′s were characterized by enormous prosperity in America. A multitude of factors combined to form one of the great economic booms in the history of modern economies. And our government used this opportunity to invoke some politics into the mix. In the late 1990′s our politicians started worrying about our national debt. The rhetoric about America going bankrupt became a persistent theme. And we took drastic measures to combat this supposed threat. Bill Clinton spearheaded the movement towards fiscal responsibility. So, the government dramatically reduced the budget deficit and sent the US economy briefly into budget surplus. The government was saving money so they could spend it later! Unfortunately, that’s not how our monetary system works. The US government never needs to save in order to be able to spend. The government, as a monopoly supplier of the currency they require us to transact in, is nothing like a household, state, European nation or business.
What happened next directly contributed to the current malaise in the US economy. If we look at the sectoral balances we can see exactly what the Clinton surplus did. As the US economy was running a current account deficit in excess of 2% in the mid 90′s the US government began to shrink the deficit. This wasn’t entirely misguided, however, it was taken to an extreme. As the current account remained steady near 2% the government’s balance continued to shrink and went positive in 1999. All the while the domestic private sector is being driven into deficit. Why? Because the government was not spending enough to allow the domestic private sector to net save. So what happens as Americans attempt to counteract this?
They fund their lifestyles in other ways. This means going into debt. As you can see from household debt levels Americans were taking on an increasingly large amount of debt in order to sustain their lifestyles. We all know what happened in 2000 as the dotcom bubble burst and the economy was thrown into a tailspin. The recession, in many ways, alleviated many of the excesses. This is the natural curing process of the business cycle and capitalism. It is a good thing. But I would argue that the Clinton surplus started the American public on the path towards a debt binge that would not end for another 7 years. It’s not a mere coincidence that the greatest debt binge in American history began during the end of the Clinton years. I believe this can be traced directly back to the Clinton surplus as the sectoral balances clearly show. Of course, there were more moving parts to it than just this, but the surplus played a key role in getting the wheels in motion. And so the seeds were sown for a much larger crisis.
The handling of the economy under the Bush administration is a different chapter in the story, but the moral of the story here is clear – this isn’t about politics. I don’t care for Paul Ryan’s or Bill Clinton’s politics. All I know is that their economics stink. And as we’re all finding out now, America is only as good as its economy and America’s economy is only as good as the people who formulate policy. Clinton sustained a good economy for much of his Presidency. Unfortunately, the wheels came off towards the end and his attempt to fix the US government’s fiscal “problems” played a key role here. Paul Ryan’s plan would catapult us towards the exact same situation. But again, let’s not allow the politics to cloud the economics at work here and like it or not, Ryan’s plan is bad economics given the current balance sheet recession. Just like the Clinton surplus was bad economics in the late 90′s.
Obviously, there are many more moving parts to the current malaise than just government spending and the squabbles between Republicans and Democrats, but I hope you’ll take one thing away from this story – the success of America isn’t about one party being right and the other being wrong. Most politicians don’t have the first clue about the workings of the monetary system so the odds are that they’re all wrong regardless of what they believe. But that doesn’t mean we should accept bad economics just because it fits with our personal political beliefs. Both parties have made enormous mistakes over the last 25 years. Ignoring good economics in favor of politics is no way to get this ship righted.
This was a post that was long overdue Cullen. Now maybe we can move past the political BS and start thinking about ways to move forward. Unfortunately, I doubt anyone outside of this website will actually do that.
Cullen It’s not a good time to reduce deficits during a balance sheet recession and it’s not a good time to reduce deficits when economy is booming. Are you saying it’s never a good time to reduce deficits? Or just that deficits should be kept at current account deficits levels in order to finance them?
So let me see if I have this right. The govt basically has to spend some money if the economy is growing. Otherwise, the amount of currency for us to all use and transact in declines and we have to go into debt, right? So Clinton got the ball rolling and Bush made it even worse by not running large enough deficits to help the private sector crawl out of their hole. Add on deregulation, the banking mess and the housing bubble and here we are. Does that sound about right Cullen?
That’s my problem with the piece as well. If banks actually had to worry about the loans on their books, the “debt binge” would have been curtailed pretty damn quickly, thus we wouldn’t have a lot of the problems we’ve got now.
Yes, if the proper regulations had been in place the housing boom never would have occurred. Clinton played a large role in deregulating the housing market as well. As I said, there are lots of moving parts here. No single party is to blame, but that doesn’t justify the bad actions.
I’m not sure that this can be blamed on running a surplus. Let’s be honest, some times, regardless of the fiscal sanity or insanity of governments, some economic events/cycles are just beyond anyone’s control.
The biggest elephant in the room is the banks. How in the world can these damn bankers continue to give out around 100 billion in bonuses. If politicians were serious, they would start there and work there way back, making sure everyone learned a lesson and flushing out the system. That bonus pool should be a solvency fund so they can bail out their damnselves.
Unless a politician is talking about holding bankers, rating agencies, and the rest accountable, I have no use for them.
The major expansion in private debt from 1999-on was allowed by lax practices, implicit and explicit government guarantees of mortgage debt, etc., etc. The more complicated the system, the more imbalance and the eventual weakness of the whole thing.
Clinton did not know the budget would balance. He had predicted it would in several more years. The economic growth was very strong and revenue came in at a faster rate than they ever predicted.
You know that the Internet bubble was ridiculous and would have busted under any circumstances. If the Clinton surplus created big problems what do you think the Bush deficit created ?
Government spend first remember.
Bye the way I am absolutely apolitical concerning Clinton or Bush.
cullen,
there never was a budget surplus, under clinton, it was only a projected surplus. the national debt was never reduced under clinton. many consider the deficit reduction that resulted from of cutting spending to be quite modest.
nonetheless, saying the brief budget deficit reduction under clinton and the gop congress, encouraged the private sector to go on debt binge, and caused the country’s current economic malaise is laughable. and you have no “real” evidence to support this. your just assuming this was the cause because it happened to occur during a certain timeframe.
the private sector debt binges were encouraged by prosperous economic times, easy monetary policy by the federal reserve(again), and resulting in wild specualtion, as has ocurred many times through history.
This data is from the BEA so you can take up its accuracy with them. You are being too critical of the “surplus”. It didn’t take the surplus to drive the pvt sector into debt. All it took was spending less than the CA deficit to force the pvt sector into deficit. The surplus was just driving the nail into the coffin.
The sectoral balances chart doesn’t “prove” that the pvt sector was forced into debt, but if you understand the obvious and direct correlation you’d have to be pretty foolish to deny any cause and effect. Just look at that beautiful chart with pvt sector surpluses as far as the eye can see until Clinton comes along. Then BOOM. We go into deficit and a lost decade occurs. Are you rejecting what is plain as day?
James, you really need to read this:
http://pragcap.com/resources/understanding-modern-monetary-system
gee, with such a great “modern monentary system” why is there such economic malaise?
deficit reductions may have cause certain optimism that helped lead to a private sector debt binge, however, there were many other things going on at the same time. most notably, easy monetary policy, a soaring stock market, and a robust economy.
most republicans were actually disappointed by the modest deficit reduction.
and who really takes government budget surplus estimates seriously anyway, let alone makes business decisions because of them? the national debt is massive, and wasn’t even touched.
are you saying because defense was cut and there was welfare reform, this lead to a debt binge by the private sector? i don’t see the connection.
Are you saying that the private sector deficit had nothing to do with the ensuing 10 year malaise? Can you honestly look at that chart, with 50 years of pvt sector surpluses and astounding economic prosperity and conclude that the sudden collapse in pvt sector balance is meaningless? If so, you are even more ideological than the politicians we rely on….
MMTer-
i rather spend my time reading the constitution.
God forbid you read anything enlightening! Reality might get in the way of your politics!
reality is, the people trying to implement this “modern monetary policy” have created bubble after bubble.
No one has come even close to implementing the policies I or other MMTers have presented. Not even close. We’re still living in the theories of old. I am afraid you have not taken the time to appreciate my work.
well. i’m a believer in the capitalist system, and believe getting government out of way, and eliminating all the federal reserve tinking, would be the best think that could happen. i guess i’m “really” old school.
however, i will take some time to read the mmt article.
James, I am in favor of eliminating the Fed also. I don’t think we’re as far apart as you might think….
Enough politics Cullen. What we really need to know is what your trading algorithm is saying right now.
James is right.
You guys are idiots.
And not the nice geeky type of idiot like Mosler, you’re dangerous idiots.
Thankfully you’re largely ignored….suck it up, no one cares about your dogma.
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