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Debating Rubinomics

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Jeff Faux and Brad DeLong revisit fiscal history. In particular, they ask whether Democratic President Clinton sold his soul for deficit reduction. Faux writes,

Hopes that the peace dividend from the end of the Cold War would finance major new programs in health care, education, and other areas of public need were dashed. Social investments as a share of the country's national income actually declined over the Clinton years. Fights over free trade split the party and contributed to the loss of the House of Representatives, from which Democrats have still not recovered. And deregulation led to an orgy of irresponsible speculation and fraud

Brad DeLong differs.

Running surpluses now, giving the country the debt capacity to finance these forthcoming rises in social-insurance expenditures, seemed to us a wise policy. The alternative -- to merely stabilize the debt-to-GDP ratio and make no special provision for the generational future -- seemed to us likely to create a situation in which a) the elderly programs eat the rest of the social-insurance state alive and b) they then self-destruct.

The entire exchange is interesting.

For Discussion. Jeff Faux asks, "Does anyone believe that more investment in health care and education would have been less productive for the American economy in the 1990s than yet more private investment in financial derivatives or shopping malls increasingly loading up consumers with imported toys and unsustainable debt? "

Comments and Sharing

CATEGORIES: Fiscal Policy

COMMENTS (12 to date)
Eric Krieg writes:

It's a myth that Americans are loading up on debt from consumer goods. Mr. Faux needs to check out the book "The Two Income Trap".

When people go into bankruptcy, it is generally a job loss that put them there, and their mortgage is the debt that put them under. Student loan and health care debts are also high on the list.

And who says that we aren't "investing" in education? Federal spending on primary and secondary education was increased under Bush. I'm pretty sure that it was rising under Clinton too.

Eric Krieg writes:

>>Still, more than 20 million jobs were created. At the end of the decade, people who 10 years earlier had been written off as "unemployable" were working, and, for a few quarters before the crash, employers were actually bidding up the wages of people making $7 an hour.

WOW! That's quite an admission there, for a liberal, honest or otherwise, to make. So I guess Newt was right, Pat Moynihan was wrong, and welfare reform worked beautifully.

Lawrance George Lux writes:

Faux obviously ignores the huge inflationary balloon in health care and education, rising faster than total economic rates, and believes further cash in the industry would have been benefical. The financial incentives which he derides did fuel the Consumption that produced the Boom. Faux also bought into the problemistic data claiming the Boom started in 1992, hindsight often finds what was not evident at the time. The Tax increase of 1993 shifted Tax Impact upward, and lower Income spending levels increased. lgl

Patrick R. Sullivan writes:

It is an interesting exchange, but not exactly a historically accurate one. No one planned the surpluses that we had in the late 90s. Certainly not Bill Clinton, as an amusing Republican TV ad made clear during the '96 election.

Bill Clinton inherited an economy in recovery (iirc, 4.7% growth in the fourth quarter of '92), and two years later had the good fortune to lose both houses of congress to the Republicans. Thus were the worst instincts of the President and his overbearing wife checked--by people with names like Gingrich, Kasich, and Gramm. That's how we got the surpluses.

Mcwop writes:

Jeff Faux states:

A few days after the election of George W. Bush, Greenspan endorsed Bush's massive tax cut, which not only wiped out the surplus the Democrats had so painfully built up but quickly put the government back in the red.

This guy is a smart economist? This statement is false and nothing short of simple political rhetoric.

One, the tax cuts did not kick in on day one.

Two, when the first small phase of the tax cuts kicked in they only accounted for about 25% of the deficit.

Three, the deficit would have occurred after the Clinton administration even if the were NO tax cuts enacted. You may only argue that the deficits may not have been as big, and it is even possible that they could have been bigger.

Four, a huge portion of the deficits are caused by declining taxable incomes. From the CBO - from 1995 to 1999, very rapid growth in very high incomes accounted for about 16 percent of the growth in the revenues in excess of GDP. In 2000 total AGI was $6,423,977, in 2002 is dropped to $6,241,036, and I believe declined further in 2003 [in millions]. From the IRS Statistics of Income Bulletin, which is a detailed look at 130.3 million individual returns for Tax Year 2001. Adjusted gross income totaled $6.2 trillion, a 3.1-percent drop from 2000, a decrease due to a substantial decline in net capital gains (less loss).

Five is the fallen stock market which contributed to declining taxable income and capital gains revenues. The CBO indicates that rapid growth of capital gains realizations explains about 30 percent of the growth in individual income tax receipts relative to GDP from 1995 to 1999. From the IRS Statistics of Income Bulletin, which is a detailed look at 130.3 million individual returns for Tax Year 2001. Adjusted gross income totaled $6.2 trillion, a 3.1-percent drop from 2000, a decrease due to a substantial decline in net capital gains (less loss).

Six is the tax cuts. Which have contributed to loss of tax revenue, but what is not been proven is the tax cuts effects on the economy (positive or negative).

Seven is the fact that spending increased all while tax revenues were declining.

CBO Report

Edgardo writes:

Two points:
1. To focus the discussion on the deficit is misleading. For public finances, the key issue is the efficiency of government programs, and Jeff Faux and anyone supporting increases in expenditures will have a hard time to persuade me that they are justified. Indeed, given 9/11 and the cuts in the 1990s, the increased expenditure in homeland security and defense appear to be efficient, although this is hard to prove.
2. I have never seen DeLong's opinion on California's public expenditure and deficits (since he's paid by state taxes he may argue a conflict of interest!). Recent Cal history has been a good example of government waste to benefit special interests (the ones supported by DeLong's party so I assume that this second conflict of interest is the real cause of his silence). I'm Argentinian and last October I laughed a lot about an Argentinian-born candidate for Cal governor who claimed that he could understand the state problems (he didn't say that for the past 50 years Argentina has not been able to solve them and today over 80% of the country's public spending is some form of transfer rather than the provision of services; in the early 50s, only 20% was accounted by transfer payments).

So, don't waste your time discussing the deficit. Focus on expenditure, reallocate resources, and if there are good government projects, don't hesitate to undertake them (but check twice that they are really good).

Lawrance George Lux writes:

It is interesting people find a 4.7% growth rate in Q4 1992, without statement of Job losses or the fact of increasing Trade deficit. A biased Study came out some time ago, which also stated Contract costs for Government supply did not increase in 2001-2004 from the record rates of the Clinton administration. One wonders what is the primary cause of the increased Government spending (even before 9/11), if Bush held down Contract costs and discretionary spending. lgl

Bernard Yomtov writes:

"It's a myth that Americans are loading up on debt from consumer goods."

Consumer debt was $2 trillion at the end of 2003, double what it was ten years ago. This includes car loans, but not home mortgages or home equity loans. It translates to an average of $20,000 per household. Other than cars, the value of what was acquired with this debt is probably negligible.

I don't know if that constitutes "loading up" or not, but I thought some actual numbers might be interesting.

Bernard Yomtov writes:

More numbers:

If you're going to pay off $20,000 over three years at 10% it will cost you $645/month, or $7,744/year. (The extra $4 is from rounding). This is not tax-deductible.

Eric Krieg writes:

Just because there is a lot of credit card debt doesn't mean that it is being used on fivolous items. If you look at the Bureau of Labor Statistics Cosumer Expenditure Surveys, people aren't buying more "stuff", because "stuff" costs a lot less than it used to.

A significant amount of that credit card debt belongs to people who use their credit cards in lieu of savings when a crisis erupts, like a layoff or an illness. If you are interested in the details, you need to read Chapter 2 of the "Two Income Trap", entitles "The Overconsumption Myth.

The reason that people don't have any savings is pretty interesting too. Again, see the book. It isn't because people are buying plasma TVs and such.

That doesn't mean that all that credit card debt isn't a problem. It is. But the answer isn't neccesarily that people lay off the consumer goods.

Bernard Yomtov writes:


I wonder if consumer debt is higher than it used to be because we use credit cards for routine purchases more than we used to.

I know that's true for me. Why shouldn't I use a card for groceries and so on as long as someone is willing to give me frequent flyer miles or another premium for doing it. As long as I pay off these charges every month it doesn't seem like a big deal, yet my consumer debt at any point in time is surely much higher now than it was ten years ago.

I'm really not sure what data we need to tell us whether consumers are over-extended or not.

Eric Krieg writes:

Bernard, I am the same way as you. I never carry a balance.

Think about the numbers. The most recent numbers I read were that the average credit card holder is carrying a balance of $8000.

But if you subtract out the people like you and me who don't carry a balance and just use the card to make purchases, the number balloons to $12,000.

Among people who carry a balance, the average balance is $12,000. That's a scary number. But the difference between $12,000 and $8,000 shows the degree to which people like you and me, who don't carry a balance, skew the numbers.

It takes a long time to get out from under that kind of debt (unless you have a home that you can refinance or declare bankruptcy).

I was listening to a financial show on the radio yesterday, and there was a credit counseler on talking about his "system" for getting out of debt. It takes 12 YEARS to get out of debt on this guys system!!!!

No wonder so many people throw in the towel and just declare bankruptcy.

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