Response To Comments On "Did Tax Cuts Spur Growth?" [22]

NASDAQ COMPOSITE: 1983 - 1987

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Was Clinton's Deficit Surplus Real or Imaginary?

Kevin also took me to task on the reality of the claim that Clinton's tax hike and spending cut program, and the resulting increase in federal revenues and economic growth, really created a budget surplus and reduced the national debt. Kevin emphatically believes it did not. In part, he may be right, but in large part, I didn't think so and wasn't nearly as sure of my position. What follows then is my analysis.

There are basically two parts to the annual federal budget, on-budget and off-budget. This I have known for a long time. What I wasn't aware of, until this week and the Debt Reduction Panel recommendations, was the size of the off-budget numbers ... some $1.4 Trillion!! WoW!. As impressive as that number is though, if it doesn't change, up or down, it doesn't affect my analysis because it is the change we are considering.

It is the on-budget numbers that we hear about all of the time, those are the Appropriated dollars, apparently the smaller of the two parts. In any event the first thing to look at is the total of the on- and off-budget outlays. The chart below presents the total picture. It offers a view of the Public Debt in two ways; in "Real" dollars and in "Nominal" dollars.

"Real" dollars represent the actual number of "greenbacks" owed. It is the accumulation of all monies borrowed and paid back since the Public Debt was last at a zero balance. "Nominal" dollars, on the other hand, represent the true value of those real dollars in terms of some base year, in this case 2010.

Nominal dollars is often a hard concept to understand; it took me quite awhile to actually "get it" even though it was critical to my job with the Air Force. For a time, I just did the calculations by rote and just trusting the theory was correct. In time, the logic finally sunk in.

It goes something like this: Would you rather be a millionaire today or 20 years ago? Most people answer they would rather be a millionaire 20 years ago. Why? Because a million dollars bought a lot more 20 years ago than it does today. Can you imagine anybody arguing that a $250,000 income wouldn't be super rich back in 1950? Well, the same idea works with the National Debt. I trillion dollar debt in 1980 was a huge deal, not so much today. So, with that in mind, let's look at the chart.

First consider the 3rd column labeled "increase from previous year" where the increase is between annual debt amounts expressed in Real dollars. Here, Kevin is absolutely right, the National Debt never stops increasing. I draw your attention, however, to the period between 1998 and 2001. Do you see how fast the increase in debt was decelerating? It increased only $18 billion in terms of Real dollars in 2000! This isn't a bad feat in and of itself, don't you think? What happened in 2000 to stop the deceleration? The Tech Boom bubble busted!

Now consider the 5th column. Here the increases in the Debt are in terms of Nominal dollars and it is in this view, where we look at the true value of the dollars, in terms of 2010 dollars, that we see a Decrease in the National Debt; at least for 2000 and 2001. The VALUE of the National Debt decreased in 2000 when compared to 1999 and the VALUE of the National Debt decreased in 2001 when compared to 2000. The debt may not have decreased in the actual number of dollar bills owed but it did decrease in what those dollar bills were actually worth, which, from an economic point of view meaning its economic impact, is the more important number. Furthermore, for the three years prior to that the debt did not increase very much at all, in nominal terms.

Real and Nominal dollars affects another point that Kevin correctly makes. The Debt did grow $1.4 trillion on Clinton's watch; in Real dollars. In 2001, the debt was $5.8T and in 1993, it was $4.4T. But the problem with comparing the 2001 $5.8T to the 1993 $4.4T is the same problem you have in comparing the millionaires I refereed to earlier. In order to put any meaning into the comparison, you have to do some arithmetic and convert each of those dollars into a constant dollar. In our case, it is a 2010 constant dollar. When you do that, Kevin still has a valid point, the Debt increased on Clinton's watch, it just isn't nearly as impressive a number. If you subtract the appropriate numbers from the chart below, you get an increase of $0.5T I believe. If the Tech bust had happened in 2001, I suspect we would have seen an actual decrease in the National Debt in terms of 2010 constant dollars. The budget surplus was just gaining momentum when it got stopped in its tracks.

I must note here that most politicians look at debt numbers in Real, non-comparative terms while most economists look at these same numbers in Nominal,constant dollar terms because that is the only way you can compare one year to another.

So far, we have been talking about the debt, which is what Kevin was referring to. But when we look at the "Deficit" we are talking on-budget, Appropriated outlays vs Federal income. In this case, I don't believe anybody disagrees that income exceeded appropriated outlays, which is the standard measure of a "surplus", during the final years of Clinton's administration. What will always be disputed was the cause. The stated purpose of President Clinton's fiscal program tax hikes and budget cuts was to achieve exactly that objective. It seems to me he did.

In terms of National Debt, I would argue as a professional Cost Analyst of which economic analysis is a major part of the job description, he achieved the goal of lowering it as well, if only briefly.

(The composition of the federal receipts are: Income taxes, corporate taxes, social security and railroad retirement taxes, excise taxes, and other. The "Other" is made up of estate taxes, gift taxes, custom duties, and employer portions of social security/railroad retirement, worker's compensation and unemployment insurance. (see sand chart below) Income from purchase of Treasury Bonds is not included)

REAL AND NOMINAL NATIONAL DEBT

CHANGE IN NATIONAL DEBT:  1988 - 2009
CHANGE IN NATIONAL DEBT: 1988 - 2009

TOTAL TAX RECEIPTS AS A PERCENTAGE OF GDP

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NASDAQ COMPOSITE 1996-2010
NASDAQ COMPOSITE 1996-2010 | Source

When Did The Clinton Good Times End

A comment on another hub I wrote on the Reagan Recession of 1981 from American Romance suggested that the stock market crashed about eight months before President George W. Bush took office. Because the chart I am going to provide is a follow-on to the ones I showed above, I told him I would answer his comment here.

I provide this stock chart for reference. It appears it was even before that; about November 1999 is when the downturn appears to be firmly established. The chart you are looking at is of the NASDAQ Composite Index and is heavily weighted by the Tech Industry.

What I find interesting about this chart is that the bottom of this crash is below that of the crash of 2008! Blew me away. The other stock indices, the DOW and S&P 500 are significantly the other way around.

If I did, I didn't mean to, but I don't think I was implying that President Bush 2's fiscal policy killed the Clinton historic boom period. I lay that at the feet of greed and speculation. I lay other maladies that followed at the feet of Bush 2's fiscal and war policies, but I will leave that for other hubs.

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Comments 6 comments

eovery profile image

eovery 6 years ago from MIddle of the Boondocks of Iowa

You are missing a great point here.

IF you want ot complement Clinton, he worked with a Republican congress, and signed about every bill the placed in front of him. Newt Gingrich was the head of the house. You want to promote someone, promote him for president. He did Clinton's work on this. They spend less than they took in. And it worked for them. This reduction and direction allowed Bush to cut the taxes, because they were not spending it. They did not need the money. Then 9/11 came and all the problems that came with it and also the war in Iraq.

Keep on hubbing!


Jeremey profile image

Jeremey 6 years ago from Arizona

Some interesting numbers. I still believe the drop in '08 is just the a sign of things to come, it will get worse before it gets better, likely much worse.

Here's a link I think may interest you, and shed some light on these numbers in relation to some others!http://www.cbpp.org/cms/?fa=view&id=692


KevinNye 6 years ago

Once again, excellent article! I just have two comments:

1) Nominal dollars are a great way to measure the relative statistical impact, but the world does not operate on Nominal dollars. My point wasn't the degree of debt increase, just the fact that there was.

2) Your comment:

"But when we look at the "Deficit" we are talking on-budget, Appropriated outlays vs Federal income. In this case, I don't believe anybody disagrees that income exceeded appropriated outlays, which is the standard measure of a surplus"...

This is my point. The operating numbers may show a surplus, but that's not really the case. The Government finances its operations, so by definition, if the debt went up, we had to borrow money because income did NOT exceed expenses. If it did, we wouldn't have had to borrow more money. I did corporate financials for years and I can make a P&L look like anything you want. The real measure of the health of an operation is to look at the balance sheet. In this case, the Government's balance sheet proves that it did not take in more than it spent.

Great hub though! It's fantastic to be challenged with an intelligent argument!


My Esoteric profile image

My Esoteric 6 years ago from Keystone Heights, FL Author

Jeremey - Thanks for the reference, I included the link in a couple of other hubs including this one. I am glad they didn't blow me out of the water.

KevinNye - And of course you are correct, the debt did not stop growing. But, I tried to point out that it almost did. If the Tech Boon had waited a year or two to Bust, I firmly believe you would have seen the total debt actually decrease in terms of both Nominal dollars and Real dollars. Unfortunately, we will never know.

Again, you are correct in the on, off-budget issue. That is why most of my time was spent looking at what happened to the total debt.

The on-budget vs total income picture, however, is nevertheless hugely important because that is what drives the national debate. As meaningless as that number may be, that is what people relate to and is what drives their psychological reaction.

In Bush/Clinton's case, I assert that it is exactly that psychological component that was one of the reasons their tax hike on the wealthy worked to spur the econonmy (and why I think it would work again). With the debt and deficit exploding, business was not willing to risk it. Once it was believed the "deficit" problem had been reversed, which. in reality it had. then the debt problem is in the process of being fixed. That reduction in the financial fear component of risk analysis, I think, opened the door for the flood of investing that happened a couple of years later when it was clear the deficits, although not the debt, were really coming down.

It is exactly the same as with the recent uptick in the unemployment rate to 9.8%. That has about as much meaning as the way we look at on-budget surpluses and deficits. The 9.8% number has about three interrelated moving parts in it that change month-to-month and as a short-term comparitve number, it really means nothing and can actually be quite deceptive, as it is now. The number in the unemployment case that should be focused on is the one that comes out the day before, the private component of the weekly jobs growth number. That is the real indicator of how things are going in the short-term.

Thank you for the compliment. I just can't stand the hyperbole that gets thrown around so much by the Right and the Left; it really rankles my INTP soul! lol.


OpinionDuck profile image

OpinionDuck 5 years ago

The tech boom was artificial and it caused more problems than it solved.

It was a speculation scam that was most likely started by new MBAs with an idea to make a fast buck, which they did.

It didn't provide a real value to the economy but the government federal and California did puff up their ranks as if the economy was real. The residue of that puff up is still affecting the California economy.


My Esoteric profile image

My Esoteric 5 years ago from Keystone Heights, FL Author

The tech boom lasted from what, 1994 to 2000? In that time, things like the Internet, as we know it today, was created, Google, Yahoo, and the like. I watched GPS go from box so big, I couldn't find room to put it in an A-10 fighter (well the engineer couldn't when I asked him when I was doing a cost analysis on it) to where it is sitting on my car's dashboard today. What is it that you find articifial and what are the problems it caused besides the stock market speculation that boomed then busted?

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