Joseph Stiglitz on the Roaring Nineties

      Lately the Clinton surplus at the beginning of the millennium have been on my mind. As a liberal Democrat I have always been proud of this legacy. After all I grew up in the 80s with the Republicans mocking Democrats as spendthrift and lacking fiscal discipline. Yet while Reagan actually gave us deficits "as far as the eyes can see", Clinton in the 90s righted things and gave us "surpluses as far as the eye can see."  Then Bush II went to the White House and returned us to the deficits as far as the eye can see.

     Again, as a Democrat I always took this to be our victory, we proved that we are the fiscally disciplined ones. Yet it has been slowly dawning on me that we are like one of those animals in a Looney Toons cartoon who suddenly our head becomes the head of a donkey with the word sucker written on our head. And maybe too fitting that Democrats are donkeys by definition.

    This all goes back to Jude Wanninski's piece on the 70s about "Two Kinds of Santa Claus." Bruce Bartless has the original article by Wanniski.

   http://capitalgainsandgames.com/blog/bruce-bartlett/1701/jude-wanniski-taxes-and-two-santa-theory

    What it comes down to is that in the past Wanniski complained the Republicans never were able to cut taxes because they were stuck in the balanced budget strait jacket where they would only cut taxes once spending was cut. His idea was that they should cut taxes and not worry about the deficit. That's what Reagan would do in the 80s. Grover Norquist as well has been questioned about his tax pledge but he follows the same script. Just cut taxes, the spending cuts will take care of themselves.

    http://www.aei.org/events/2011/11/29/pledge-or-wedge-grover-norquist-vs-ross-douthat-on-the-taxpayer-protection-pledge/

    While in the above linked debate Ross Douthat argues otherwise, it seems to me that this is exactly how it's gone. What has confused Democrats is that the GOP preaches balanced budgets but doesn't deliver them. The opposite is the case-we had the largest nominal deficit in history under Reagan between his tax cuts and huge cold war spending.

    Then under Clinton fiscal discipline was preached. Clinton said fine and passed the Budget Deficit Reduction Act without a single Republican vote. And it worked, The deficit was tamed and we even had a surplus which was way ahead of any projections by the most optimistic forecasters.

    So we win right? I mean we show that the Republicans are hypocrites they don't really believe in balanced budgets, their rhetoric says one thing their record the other. And we have Cheney declaring, "Reagan showed deficits don't matter."

    Yet as Stiglitz shows we should at least rethink this. In a way Wanniski's theory has worked, as the Democrats have become the "Scrooge" party while the GOP has become "Santa Claus" as now Dems feel like they can't raise spending until the deficit has been tamed-the GOP used to be the one that couldn't cut taxes until budget balance. This is the legacy of Clinton-style Democrats and it is not a wholly satisfactory one.

    Stiglitz is honest and circumspect enough to admit that in some part of the the growth story of the 90s was dumb luck. He admits that the 1990-91 recession was already over by the time the Clinton team won on November 1992 much less was sworn in January 1993.

     He argues that the deficit reduction worked but not necessarily for the reasons that most thought. He argues that the 90s were a poor lesson in many ways as they wrongly imply that deficit reduction is the way to jump start the economy when this is not the case-there were very special circumstances why it worked in the 90s.

     Deficit reduction, Stiglitz tells us, normally slows a recovery. What happened in the 90s was this: by lowering the deficit Clinton recapitalizing a number of U.S. banks. This was not by design but inadvertent. The need was there because of the fallout from the Savings and Loan Debacle-a debacle that stemmed from Volcker jacking up interest rates so high and putting the banks in peril, and then Reagan's reckless deregulation giving the banks a new way to make profits.

     All of this couldn't be more timely now as with a Democrat in the White House the concern about deficits has made a comeback. Yet what Cheney said remains true-deficits don't matter, provided a Republican is in the White House.

      In a way then Democrats have been tricked into thinking that deficits matter at least a lot more than they do. We're a victim of our own success.