Hillary Clinton overreaches with assertion that Democrats own narrative on economic success
“There’s just a pattern here, where the other side continues to use the same old tired policies. They don’t work, and then Democrat presidents have to come in and fix what was broken. . . . If you look at the evidence at the end of Bill Clinton’s two terms, we had the longest peacetime expansion in American history, with 22 million new jobs, a balanced budget and a surplus that would have paid off our national debt had they not been so rudely interrupted by the next administration.”
— Hillary Rodham Clinton, remarks in Hanover, N.H., July 3, 2015
Both Democrats and Republicans have their own narratives of U.S. economic history.
The Republican narrative often features Ronald Reagan and how he supposedly rescued the economy from the bad decisions of Jimmy Carter with an elixir of tax and spending cuts. Hillary Clinton, in a recent speech, offers a version of the Democratic narrative — that Bill Clinton balanced the budget and left behind a huge surplus that was squandered by his successor, George W. Bush.
But does this narrative make economic sense?
The Facts Regular readers know that The Fact Checker frowns on claims that suggest a president is responsible for every good or bad thing that happens to an economy on his watch. The U.S. economy is huge — and decisions made long ago continue to reverberate in the future.
Thus, by drawing such a bright line between Democratic presidents and Republicans, Clinton runs the risk of engaging in economic sophism.
The Clinton campaign offered David Kamin, a campaign adviser and New York University law professor, to make its case. Essentially, he argued that the boom in the 1990s was the direct result of policies advanced by Bill Clinton, in particular a 1993 budget-deficit plan that attracted no Republican votes. Moreover, he said the shift from budget surpluses to budget deficits in the 2000s was not inevitable and was the direct result of policy choices made by the George W. Bush administration.
President Clinton’s 1993 deficit plan, which set a target of cutting the deficit by $496 billion over five years, certainly was a political and economic gamble. Hefty tax increases on the top 2 percent of taxpayers were an important element, but Clinton also included a major expansion of a tax credit for the working poor.
Republicans predicted gloom and doom if Clinton’s plan was passed into law, but they turned out to be wrong. But it’s important to recall that Clinton’s plan was never intended to achieve a balanced budget. After the bill’s passage, the Congressional Budget Office estimated that the deficit would decline modestly — from $290 billion in 1992 to $200 billion in 1998.
The Clinton budget plan was actually slightly smaller, on an inflation-adjusted basis, than the bipartisan deficit-reduction package signed into law in 1990 by George H.W. Bush. Both budget deals included a mechanism known as “PAYGO” — pay as you go — which prevented lawmakers from boosting spending without paying for it with additional revenue.
Fast-forward to 1995. The Democrats had lost control of the House and the Senate, largely because of bruising budget battles. Clinton’s fiscal 1996 budget proposed $200 billion deficits every year for the next five years.
But Republicans, who were now in charge of Congress, set the goal of achieving a balanced budget. After resisting for a few months, Clinton shocked many fellow Democrats by announcing that he, too, would embrace the idea of a balanced budget. In other words, the policy debate in Washington substantially shifted because of the GOP takeover of Congress and its embrace of a balanced-budget goal.
Meanwhile, there were economic forces that had little to do with either Democrats or Republicans; Clinton was lucky to have become president just as a revolution in computer and information technologies was unleashed. A gusher of tax revenue emerged, primarily from capital-gains taxes, because of the run-up in the stock market, as well as taxes paid on stock options earned by technology executives.
From 1992 to 1997, the CBO estimated, tax revenue increased at an annual average of 7.7 percent in nominal terms, or about 2.4 percentage points faster than the growth of the gross domestic product, the broadest measure of the economy. Between 1994 and 1999, realized capital gains nearly quadrupled, the CBO concluded, with taxes on those gains accounting for about 30 percent of the increased growth of individual income tax liabilities relative to the growth of GDP.
There were other factors as well, such as lower-thanexpected health costs that reduced an expected drain on the budget. George H.W. Bush, Clinton’s predecessor, also had kicked in motion a huge decline in defense spending (which Clinton accelerated) and had overseen a painful restructuring of the banking industry. Even a potential shock, such as the Asian financial crisis in 1997, brought the silver lining of lower oil prices that bolstered the U.S. economy.
In the 2000 campaign, both George W. Bush and Democrat Al Gore had grand plans for tapping what was then predicted to be a $2.2 trillion surplus over 10 years. The left-leaning Center on Budget and Policy Priorities in 2000 produced an analysis that concluded that Bush’s proposed policies would tap $1.9 trillion of the surplus, while Gore had proposed using $1.4 trillion.
Bush, of course, touted a $1.3 trillion tax cut, but Gore had countered with a $500 billion tax cut — and had planned to increase spending. In theory, Gore had a plan to eventually eliminate the national debt, by reserving about 35 percent of the anticipated surplus to buy back outstanding bonds. But the CBPP warned that both Bush and Gore had probably underestimated the costs of their various initiatives.
As things turned out, surpluses disappeared almost as quickly as they had emerged, largely because of economic reasons. A weakened economy, the popping of the bubble in tech stocks and other factors meant that hundreds of billions of dollars in expected revenue had turned out to be ephemeral. In just a year, capital gains returns fell 20 percent; income growth from stock options fell as much as 40 percent, the CBO estimated.
The economy also suffered a major shock with the Sept. 11 terrorist attacks in 2001 — and, of course, the nation embarked on wars in Afghanistan and then Iraq. The PAYGO spending restraints expired, and Bush and Congress funded the wars and homeland security improvements, and a Medicare prescription drug plan, through deficit financing.
Kamin points to the fact that by 2003, it was very clear that the surpluses were gone, and yet Bush persisted on additional tax cuts and deficit-financed war funding, thus digging the fiscal hole even deeper.
By contrast, Kamin said, Bill Clinton maintained that fiscally prudent course by vetoing GOP efforts to pass a tax cut and instead committed the nation to fully paying down the national debt in his last budget plan.
Yet this document was issued just one month before tech stocks reached their peak — and George W. Bush inherited the economic hangover caused by the end of the dot-com party. This is another example of why it is foolhardy to try to draw bright lines between presidencies.
In 2012, the CBO issued a final document demonstrating that one-third of the evaporation of the surpluses can be attributed to CBO’s forecasting errors.
Thus, much of the money that Gore had said he would have saved for paying down the debt, after paying for all of his other projects, would not have been there. The numbers do not add up for Hillary Clinton’s claim that there would have been enough of a surplus to pay down the national debt if a Republican had not won the presidency in 2000.
The Pinocchio Test It is certainly fair game for Hillary Clinton to compare the fiscal record of the Clinton administration with the record of the George W. Bush administration. But she goes too far to suggest that a Democrat would have preserved the surpluses and paid down the national debt, when a good chunk of that supposed surplus was based on forecasting error.
We can’t go back in time, but neither can Hillary Clinton. Democrats and Republicans — and the stock market — all share some credit for the balanced budgets of the 1990s. She should acknowledge that. Moreover, the prospect of paying down the national debt was probably just an illusion — and would never have been accomplished no matter who was president.
The Pinocchio rating is difficult, given that the issue involves some historical speculation, so we will keep it at Two.
President Bill Clinton discusses the budget surplus during an appearance in the WhiteHouse Rose Garden in September 2000.