Balancing the Budget is Great-If It’s Done Correctly

Sure it’s good that the budget was balanced in the late 1990s for the first time since 1969, and it’s bad that Bush has run deficits as far as the eye can see. But balancing the budget is not the holy gail of economic policy making. And while Democrats were right to call for reducing the deficit, we should all heed the words of Paul Krugman in his 2001 book Fuzzy Math. While it is common for Democrats of multiple ideological stripes to claim “Clinton balanced the budget” the real reasons for the budget surpluses from 1998 to 2001 are more complex-and in some cases frightening. Not frightening in the Michael Myers-Freddy Krueger sense, but in a moral, small “d” democratic sense.

While Reagan ran up huge deficits, he did help pave the way for the surpluses a bit by-following Carter’s lead- raising the Social Security and Medicare payroll taxes in 1983.

Yes Clinton and the Democrats were brave to raise the top tax rate in 1993-as were Bush Sr. and the Democrats were to break the “read my lips” pledge in 1990. A drop in military spending following the end of the Cold War also played it’s part in reducing deficits. So did a drop in discretionary spending. As Krugman notes,

” Defense speding was 6.2% of GDP in 1986, but only 2.9% in 2001. Non-defense spending also grew more slowly than the economy, falling from 3.3% to 3.1% of GDP.”

A bigger part of the answer was the economic growth takeoff in the second half of the 1990s. From 1973 to 1995 economic growth averaged less than 3% a year, but averaged more than 4% from 1995 to 2000. As Krugman explains, “a bigger economy means more income subject to taxes, so the economic boom naturally translated into a revenue boom.”

So a boom in economic growth helped, but doesn’t explain everything. Meantime, taxes were raised under Bush Sr. and Clinton, but were still lower than what they had been before Ronald Reagan. The main explanation of the rising tax take according to Krugman: Growing Income Inequality (or “a change in the distribution of national income”). Don’t take my word for it, just hear Krugman out.

“First, profits grew faster than workers’ wages; since profits are taxed more heavily than ordinary workers’ wages, that increased revenue. Second, incomes grew much more rapidly at the top of than at the bottom (or middle) of the income distribution. The income tax is the main tax on the top 20% of taxpayers… most of the tax is paid by families in the top fifth of that distribution…. Income growth was concentrated among families in the highest tax brackets, thus pushing revenues more rapidly than average income growth.

“Third, the stock market boom meant that virtually anyone who sold a stock after 1995 sold it for a big gain-and capital gains are taxable. The result was a further boost to tax revenues.

Finally, “about half of all income taxes are paid by families in the top 5% of the income distribution. Between 1990 and 1999, while the real income of the average family rose only 15%, the real income of the top 5% rose 35%! Since the income of the families that pay most of the income tax grew much more rapidly than that of other families, it’s not surprising that income tax revenue has also grown much more rapidly than the economy as a whole.” (Krugman, pg. 41 and 63-64).

So a budget surplus is usually a good thing. Meantime many folks from Jim Wallis to John Kerry (who said back in early 2001 that the wealthiest benefited the most from the 1990s boom) have argued-correctly-that budgets are in fact, moral documents.

Still, a relevant moral question to ask is “how’d you get the money in your budget in the first place?” How a business spends it’s profits is important, but are those profits the results of high sales? Or low wages? Would you rather work for a business that gets a loan from a respected bank, or from Tony Soprano?

No, I don’t argue that Clinton was no better than Bush- the wealthy don’t need anymore tax breaks-especially when they are the main cause of huge deficits. But those who call for “fiscal conservatism” a “balanced” budget, a government that “lives within it’s means” etc., no matter how well-intentioned, need to answer the question “where is the money for these policies going to come from?” An economy that grows while distributing it’s benefits (relatively) equally? Or are the new tax dollars the result of the whole growth in the economic pie going to the already very rotund? To paraphrase NasCar: “Gentlemen (and ladies), start your (discussion) engines!”

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About Nick

Teacher of Social Studies. Born in the 1970s. History major, music minor. Big Baseball fan. Economic progressive.
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One Response to Balancing the Budget is Great-If It’s Done Correctly

  1. Off topic, but I just thought I would say hello to a few old blogger friends.