Clinton’s Recession

Clinton’s Recession

I recently read another conservative explanation that Federal budget deficits don't cause inflation or high interest rates or recessions (Brian Wesbury, "Deficits Don't Matter", The American Spectator, March 2004). Federal borrowing does not in fact "crowd out" private investment, however attractive the idea seems in theory.

My mind turned immediately to the Clinton years. Clinton and his apologists love to point to the three years of budget surpluses that ended his term (1999-2001). The point has been made before that the Clinton team can claim no wisdom in that regard, since right up to the day Treasury’s balance sheet went out of the red they were predicting overwhelming deficits as far as the eye could see. That was their justification for raising taxes.

Now their story is that Clinton raised taxes, gave us the best economy in history, and saved the country by producing surpluses. Then George Bush came in and cut taxes, deliberately causing a recession and corporate scandals. The way I remember it is that Clinton raised tax rates in the middle of a weak recovery, which stayed weak until the day after the 1994 elections; the day after the Republicans took over the House and the Senate, the stock market and the economy took off. The budget surpluses came at the end of the boom.

Let's pause a moment to look at where Clinton's budget surplus came from. Federal revenues increased in the later '90s. About two thirds would have occurred because of the rising GDP without Clinton’s tax changes, and about one third of the increase came from Clinton’s rate increases in the same booming economy. There is a third factor in changing the balance sheet--decreased spending. The only spending cuts Clinton made were in defense. In 2000, the budget surplus was the same as the cuts in defense spending. So in effect, Clinton "balanced" the budget by raising taxes--a known economic drag--and increasing spending to match the increasing revenues. The surplus came from defense cuts.

As I was saying, the budget surpluses came at the end of the boom. Now, I know that post hoc ergo propter hoc is a fallacy of inference (though it is the fundamental postulate of science), but it is certain that propter hoc ergo post hoc, so we can be sure that the surpluses didn’t cause the boom. What came after--actually, in the middle of--the surpluses was the recession, which started on Clinton's watch, just as his "record stretch of economic growth" started during Bush I's term.

In fact, Clinton’s recession was probably caused less by anything he did than by the cost of heading off a Y2K computer disaster and the Federal Reserve’s attempts to deal with the Y2K uncertainties. But when you are sparring with the Clintonistas, you can twit them that the recession came after his surpluses (“massive year-after-year Keynsian drags on the economy”). They probably won’t know about the Fed, and if they do try to shift the blame from Bent Willie to the Fed, they also shift the blame from George Bush. They won’t like that in any case, so insist that they be consistent: If it’s Bush’s 2001 recession then it must be Bush’s 2001 surplus.