Comments: The return of the golden 1990s?

Please explain how exactly "aggressive cuts in budget deficits" stir economic growth? While implying some unnamed individuals opposed the policy and were wrong, you don't even supply a reason why the policy you favor should produce these results. The evidence of the 90's you site, reducing budget deficits fuel economic growth is merely evidence by association as opposed to explaination.

I'm not sure you even understand the undercurrents of the 1990's. Name a single year in the 1990's when government spending shrank? You might believe that aggressive cuts in budget deficits would be associated with spending cuts. It just didn't happen.

In the US, Bill Clinton nevered proposed budgets that aggressively reduced budget deficits. In the year the budget to eliminate deficits over seven years started with the Clinton proposal of deficits of $200 billion annually as far as the eye could see. It turned to surplus in a year or so not because of anything in the budget or anything Bill Clinton did. Spending growth (yes growth) slowed and revenues exploded in the late 1990's. The explaination for the growth is the Fed's aggressive increase in the money supply to protect the economy from the "Year 2000 problem" and the capital gains tax cut in 95/96 that increased rewards for risk taking and work.

David, what's the Rubin explaination of the benefits of the elimination of budget deficits? Reduced interest rates that lower the cost of capital, right. David, what are interest rates now compared to the late 1990's.

Posted by Gary Bezowsky at December 9, 2003 02:44 AM

How does reducing budget deficits promote economic growth? Three ways:
1 It reduces "financial" crowding out and therefore, other things being equal, will cut interest rates relative to what they would have been.
2. It reduces expectations of future tax rises and therefore promotes spending. This is known as Ricardian equivalence - people respond to big budget deficits (which they see as implying higher taxes in the future) by reining back spending.
3. It implies greater pressure on controlling the government sector. Private sector productivity is higher than in the government sector - therefore restricting the government sector's share of the economy, as happened in the 1990s, is good for growth.

Posted by David Smith at December 9, 2003 12:29 PM

Crowding out? Interest rates are at historic lows in the US and lower than at anytime in the 1990's. Just how do you square that circle? Take a look at actual economic history, the Robert Rubin position that a budget surplus or small deficits lead to lower interest rates isn't supported by history. The Wall Street Journal has made this point many times referring to studies of past history. Interest rates are more closely related to expectations of inflation and the debasement of the currency through excesive money supply growth. Given the size of the world capital markets, budget deficits in the 3% to 5% range likely do not have that much of an impact as long as the Federal Reserve is mindfull of the money supply growth. The laboratory of the real world is the best test of "crowding out theory".

I have never heard of Ricardain but will look at the information. I am a little skeptical. Consumer spending has continued to increase for as long as I can remember and investment spending seems more closely coorelated to expected returns and influenced by tax policy at the margins (ordinary and capital gains). If people can't be convinced to fund their own retirements (a known future obligation), I'm hard pressed to believe that large budget deficits would lead people to believe that tax increases are coming and favor saving over spending.

I would love to see government spending decline in absolute terms. We would be better off without that drag on economic growth. Politically, the only way to control the growth of government is to cut off the oxygen. Balance budgets don't have a sizable political constituency. The Republicians haved learned that lesson. The Democrats never cared about balanced budgets until they lost power.

What turns my crank and my strong resonses to your columns is tendency to recast the economic policies of the Clinton Administration, hold them up as shining examples and ignore contrary evidence. The best thing he did was get out of the way, support free trade, sign welform reform and cut capital gains taxes. And most of these were forced upon his administration by a Republcian Congress. Welfare reform was adopted because he wanted to be re-elected in 96 during a so-so economic climate. The cut in capital gains taxes were pushed upon the Clinton Adminsitration by the opposition party in the House. Even his own party abandoned Clinton over welfare reform and NAFTA. The Clinton rhetoric about balanced budgets was just that, rhetoric. The man was not an aggressive advocate of balanced budgets and small government. He just said those things. Have you forgotten the man wanted to nationalize the US healthcare system.

Posted by Gary Bezowsky at December 9, 2003 07:06 PM