A little bit of economic history:
On August 10, 1993, President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993 (the 1993 Budget Act). Four days earlier, it had passed the Senate by a vote of 51 to 50 – with Vice President Gore breaking a tie and casting the deciding 51st vote for passage. (Note: You didn’t have to get 60 votes to pass anything in the Senate in those days. The filibuster was reserved for extraordinary occasions, like denying civil rights to black people.) The day before that it had passed the House by a vote of 218 to 216. In both Houses of Congress, the vote literally could not have been closer. And in both cases, not a single Republican voted in support of the Act.
The 1993 Budget Act was President Clinton’s response to mounting federal deficits and debt. Under President Carter, the federal deficit had been modest – averaging $55 billion a year. But under Reagan, it exploded to an average of $186 billion a year. Federal spending as a percentage of GDP went from less than 21% under Carter to an average of around 23% under Reagan. During the eight years Reagan was president the national debt nearly tripled, from roughly $900 billion to $2.6 trillion. It rose from 34% of GDP to 55% of GDP. By the last full year of George H.W. Bush’s presidency, the federal budget deficit had reached a record $290 billion (after having also set a record the previous year). Reaganomics had resulted in a bloodbath of red ink. (As an aside, contrary to popular myth, economic growth averaged slightly higher under Carter than it did under Reagan.)
All that debt was creating a political backlash. During the 1992 presidential campaign, independent candidate Ross Perot managed to garner 19% of the vote, with opposition to continuing federal budget deficits one of the cornerstones of his campaign.
The 1993 Budget Act was President Clinton’s response to the economic and political consequences of mounting federal debt. Among other things, it:
- It created 36 percent and 39.6 income tax rates for individuals.
- It created a 35 percent income tax rate for corporations.
- The cap on Medicare taxes was repealed.
- Transportation fuels taxes were raised by 4.3 cents per gallon.
- The taxable portion of Social Security benefits was raised.
- The phase-out of the personal exemption and limit on itemized deductions were permanently extended.
Rep. Robert Michel (R-IL), Los Angeles Times, 5/28/93:
They will remember who let loose this deadly virus into our economic bloodstream.
Rep. Newt Gingrich (R-GA), GOP Press Conference, House TV Gallery, 8/5/93:
I believe this will lead to a recession next year. This is the Democrat machine's recession, and each one of them will be held personally accountable.
Rep. John Kasich (R-OH), 5/27/93:
...your economic program is a job killer.
Rep. John Kasich (R-OH), CNN, 7/28/93:
This plan will not work. If it was to work, then I'd have to become a Democrat...
Rep. John Kasich (R-OH), CNN, 7/28/93:
...We have a stagnant economy and there is nothing down the road that makes it look like we're going to have the kind of economic growth that puts people to work.
Rep. John Kasich (R-OH), 8/5/93:
Do you know what? This is your package. We will come back here next year and try to help you when this puts the economy in the gutter...Rep. John Kasich (R-OH), GOP News Conference, Senate Gallery, 8/3/93:
Come next year... we're going to find out whether we have higher deficits, we're going to find out whether we have a slower economy, we're going to find out what's going to happen to interest rates, and it's our bet that this is a job killer.
Rep. Robert Dornan (R-CA), 8/5/93:
The problem with our economy is that there is too little employment and too little growth. This plan will do nothing to improve that condition and will actually make it worse.
Rep. Christopher Cox (R-CA), 5/27/93:
This is really the Dr. Kevorkian plan for our economy.
Rep. Thomas Ewing (R-IL), 8/5/93:
...This bill is a disaster waiting to happen.
Rep. Jim Ramstad (R-MN), 3/17/93:
...will stifle economic growth, destroy jobs, reduce revenues, and increase the deficit.
Rep. Phil Crane (R-IL), 3/18/93:
...a recipe for economic and fiscal disaster.
Rep. Dick Armey, CNN, 2/18/93:
I will tell you, this program will not give you deficit reduction. It will be a disaster for the performance of the economy.Rep. Dick Armey (R-TX), CNN, 8/2/93:
The impact on job creation is going to be devastating, and the American young people in particular will suffer a fairly substantial deferment of their lives because there simply won't be jobs for the next two to three years to go around to our young graduates across the country.
Rep. Dick Armey (R-TX), CNN, 8/2/93:
Clearly this is a job killer in the short run. The revenues forecast for this budget will not materialize; the costs of this budget will be greater than what is forecast. The deficit will be worse, and it is not a good omen for the American economy.
Rep. Dick Armey (R-TX), 8/5/93:
The economy will sputter along. Dreams will be put off and all this for the hollow promise of deficit reduction and magical theories of lower interest rates. Like so many of the President's past promises, deficit reduction will be another cruel hoax.Rep. Wally Herger (R-CA), 8/4/93:
The simple fact is that the Clinton plan will not lower interest rates. It will not lower inflation. It will not create jobs. And it will not lower the deficit. The Clinton tax plan will spur inflation, lose jobs, increase the deficit, and hurt our economic growth.Rep. Deborah Pryce (R-OH), 5/27/93:
The votes we will take today will not be soon forgotten by the American voter. [They] will lead to more taxes, higher inflation, and slower economic growth.
Rep. Jim Bunning (R-KY), 8/5/93:
It will not cut the deficit. It will not create jobs. And it will not cut spending.
Rep. Clifford Stearns (R-FL), 3/17/93:
...It will be the kind of impact that this country can't absorb. It will slow economic growth, contribute to the massive federal deficit....
Rep. Joel Hefley (R-CO), 8/4/93:
...It will raise your taxes, increase the deficit, and kill over one million jobs.
This is just a sample of the Republican OUTRAGE at the time.
Of course, the rest is history. What followed was the longest economic expansion in US history and the fastest economic growth in a generation. Over 23 million jobs were created (compared with a total of 5 million during the 12 years of BOTH Bushes combined – much less than the increase in the labor force during those years). The stock market surged during the Clinton presidency with the S&P 500 increasing by 300%. Clinton bequeathed a federal budget that ran four consecutive years of surpluses totaling $560 billion. The projected 10-year surplus when he left office was $5.6 trillion (causing Fed chairman Alan Greenspan to express concern that the entire US debt may get paid off too rapidly and surpluses would have to be invested in private securities – which was considered a bad thing until Bush proposed privatizing Social Security). Those surpluses were a result not only of painful tax increases but also of a decrease in the relative size of the federal government. Federal spending as a percentage of GDP fell from 22.1% in 1992 to 18.4% in 2000.
And all this began without the support of a SINGLE Republican in Congress, as they predicted economic calamity would follow from the 1993 Budget Act.
UPDATE: George W. Bush and the Republican Congress proceeded to enact a series of tax cuts and spending increases that had the effect of nearly doubling the national debt, increasing it by over $5 trillion in eight years. Vice President Cheney declared, “Reagan proved deficits don't matter”. For the fiscal year ended September 30, 2008 (fiscal 2008), the US government for the first time in history added over a trillion dollars to the federal debt (including various special appropriations that are excluded from the budget deficit calculations that you generally see reported). Bush ran the six highest annual federal budget deficits in US history if you include the $485 billion deficit he ran in just the first three months of fiscal 2009 – leaving the country on course for another $2 trillion annual deficit. At the same time, federal spending as a percentage of GDP rose from 18.4% to almost 21%.
UPDATE 2: President Obama, faced with the worst economic crisis since the Great Depression, proposed an economic recovery plan consisting of a package of tax cuts and spending proposals. As the “American Recovery and Reinvestment Act of 2009” was eventually passed by Congress, it consisted of 35% tax cuts and the remainder spending and benefits for those hurt by the economic downturn. According to a Congressional Budget Office analysis, 74 percent of the total cost of the stimulus bill will go out in the first 20 months – in the remainder of FY 2009 (which began October 1) and FY 2010. Just like the 1993 Budget Act, the Obama recovery program passed the House without a single Republican vote and passed the Senate with only three Republican votes – receiving exactly the 60 votes it needed, without a single vote to spare.
Congressional Republicans claimed the recovery program constituted “generational theft”. The comments of Rep. Mike Pence (R-Ind) were typical: “It won't create jobs. It won't stimulate this economy. And it may do more harm than good." This is part of the Republican, “strategy of emphasizing its so-called bedrock principles — restrained spending, limited government and deep tax cuts.” (“GOP tries to restore image of fiscal discipline”)
And we all tried our best not to laugh.
8 comments:
I'm still trying to understand why Clinton gets the credit for everything and the blame for nothing. Clinton's corporate income tax was only 1% higher than Bush sr.'s, and still 5% lower than Reagan's. The economic bubble of the 90's followed NAFTA, the tech boom, and later the merger-mania of Clinton's banking de-regulation (for which we now pay the price dearly) and housing boom brought on by the Clinton admins initiatives (ditto). Increased consumer spending was paid for by mounting levels of personal debt, thanks to de-regulation of the credit-card industry, and Chinese wage slavery (thanks to Clinton's opening of trade with China).
During the 90's, people of modest income could buy ever more wigits, but the price of essentials like education, housing, and medical care rose well beyond their wages.
As you yourself note, the budget surplus followed a shrinkage in the size of govt., which was a result of the Newt-led "Contract" more than Clinton's initial goals.
Lowering unemployment figures in the 90's resulted from cooked books - see Kevin Phillips.
Clinton gave the economy a dangerous, reckless shot of steroids and now we are paying for it. It was all short-term gains, for long-term losses. He was smart enough to save his biggest moved for his second term - leaving the consequences for future administrations.
You can't seriously give Republican's credit for fiscal responsibility during the Clinton years.
First, this blog post was focused specifically on a balancing measure passed before the republicans could get credit. Second, they were largely the same group of people that did so many horrible things to our budget under Bush.
Don't forget that Clinton was the first modern Wall Street Democratic President. Perhaps the problem isn't party related, but strings related. Until recently the Republican party could have been painted with this brush. Now I think the only applicable descriptions are Anti-Government and Religious Zeal.
Russ, I think you're skipping a lot of important stuff precisely at the line, "Of course, the rest is history."
I don't think one can reasonably give the credit for fiscal discipline during the Clinton presidency to one party or the other; it's either both or none. (I lean toward none -- partisan rivalry made them responsible in spite of themselves.)
The point that should be emphasized is that, however it happened and whoever should get the credit, we did have fiscal responsibility and it did work, for more or less everyone. By contrast, the Republicans' reckless fiscal and military adventures over the last eight years have brought us to the brink of bankruptcy, and the Democrats' instinctive recourse to a government solution seems likely to push us over the edge.
President Obama is a good man, but economics was never his strong suit and I believe he is being led to overestimate his ability to rescue the economy, in much the same way that his predecessor was led to overestimate his ability to remake the middle east.
Boot,
I don't consider much of anything that happened in the 90's to be "fiscally respsonsible." And I'm no Republican - not by any strectch.
What I'm responding to is the total non sequitur of linking Clinton's 93 budget to the boom that followed, as if it were the primary cause. It overlooks 90% of the story.
The third paragraph of your first post looked to me like you were giving credit to were it certainly wasn't due.
As you say, this is a simplistic explanation of a complex history. But we can only reasonably digest to much at a time. Perhaps it should have started or ended with a line saying this is but one part of a whole.
Raising Taxes and Cutting Spending is the moral thing to do. Otherwise we burden the future with our failures. In an economic downturn, a temporary burst of smart deficit spending makes sense. But we have no adults in the room who will make up for that spending with surpluses.
The central argument of the blogpost is that the Republican prophecies of doom were not merely wrong in 1993, but completely wrong and amusingly wrong. Yet they're trying the same game today; the biggest threat to our economy's recovery is the risk that we might take them seriously. Some of the tax cuts in the just-passed ARRA are indeed perverse.
Economies run on demand: the ability to pay for something you want. Where there is demand, some clever person will find a way to fulfill it and that makes the economy go round.
In general, when private sector demand is down, government sector demand must rise to fill the gap; otherwise we have an overall fall in demand and that leads to economic contraction. It would be nice if this could be done without increasing deficits but the means (e.g. a tariff to equalize the labor cost of imported vs. domestic goods, reviving the Security Transactions Excise Tax) aren't getting any air time.
When private sector demand is up, public sector demand can cut back and we should pay off deficits.
Longer term, it's important to differentiate between kinds of public spending: anyone who's operated a business understands the difference between spending on (A) continuing operations vs. (B) investing in additional capacity. Spending on a war of aggression is (A); spending on well-considered infrastructure projects is (B).
i think the world will survive through the remaining years of humans running the economy
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