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Did Clinton have it easy?


Noam Scheiber compares the task facing deficit hawks in 2009 to the task facing deficit hawks in 1993:

The decision about whether to rein in the bulging deficit or spend money on the rickety economy divided the incoming Clinton team. But, in retrospect, the challenge was much easier than the one confronting Obama. For one thing, GDP had been growing for almost two years in early 1993, versus only a single quarter today; unemployment was almost three points lower. For another, the deficit was actually far more tractable back then. The end of the cold war promised a peace dividend, and the bill for the baby boomers’ Social Security and Medicare benefits was basically 20 to 25 years away. Today, the entitlement spending boom is right around the corner, we’re surging in Afghanistan, we’ve spent a few hundred billion dollars propping up the financial system, and we already have one pricey stimulus on the books.

One point that doesn't get very well explained in these arguments is that it's easier to cut the deficit when the economy is growing. To put it in the simplest terms, recessions mean the government gets less money because people are poorer and pay less in taxes, and spends more money because people are poorer and need more help. Expansions are the reverse: The government gets more and can spend less.

As Noam goes on to explain, one of the difficulties facing the Obama team is that it was a lot easier to see how to kick-start the economy in 1993 than in 2009. Interest rates were high, which meant it was hard for the private sector to borrow, invest and grow. Happily, lowering them proved a pretty straightforward process, and the economy took off on schedule. Even better, quickening economic growth was functionally the same thing as reducing the deficit: You lowered interest rates by cutting government borrowing.

Not so today. Interest rates are dead low and the economy is nearly unconscious. The only stimulative option left requires borrowing or printing money. Congress and the Federal Reserve both seem loath to do that, but that means the economy won't grow much and deficit reduction will be virtually impossible. We'll be left with the worst of both worlds: a serious deficit problem and a bad economy.

The compromise people are hoping to strike is more spending now attached to credible commitments to cut the deficit later, but the problem is that the obstacle to more spending now is not insufficient confidence that Democrats will cut the deficit later, but Republicans and conservative Democrats who think their political interests are served by permitting double-digit unemployment for the foreseeable future. In other words, the compromise that people want to strike is a compromise with the bond markets, not with the relevant legislators. And bond markets, powerful as they might be, do not have votes in the Senate.

Photo credit: By Stan Honda/Getty Images

By Ezra Klein  |  December 11, 2009; 4:04 PM ET
Categories:  Economy  
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Joe Stiglitz has argued that cutting the deficit as Clinton did also led to the lowering of interest rates which added to economic growth.

Obama is in an upside down situation he must increase the deficit to spur the economy. I fear he shies away from forcing blue dogs to take a difficult vote where they would have to choose between perceived as increasing the deficit and the other perception of denying aid to the unemployed.

Posted by: bcbulger | December 11, 2009 4:34 PM | Report abuse

Then there's interest rates...they can't be cut! Thanks Alan Greenspan! One of the best tools rendered inoperative.

We are in a frightful mess. However, people seem to be cleaning up their balance sheets a bit (less debt, more saving) but that hurts the economy, too. So in the long run people will be better off, but in the short run we are all worse off. No good answer there.

The key is jobs. And the key to jobs is growth. I guess the debate is how to jump start the kind of growth that grows jobs by 300K per month (PK).

You would think we could build those wind turbines for that wind farm in Texas for about the same price as the Chinese can. But evidently we cannot. This, I think, is the intractable problem as much as anything else.


Posted by: luko | December 11, 2009 4:51 PM | Report abuse

Perhaps it's time to turn to reconciliation (50 votes in the Senate) to pass something like a 5% surcharge on incomes over a million. Apply the money to bringing down unemployment and call the thing the 'Jobs, Jobs, Jobs' bill.

Posted by: pipster | December 11, 2009 5:25 PM | Report abuse

The main problem that deficit hawks face is that they confuse the map in their head with the actual terrain we are going through.

We have massive unemployed domestic resources. Yet the deficit hawks talk about arbitrary self-imposed limits on spending drawn from models that assume an automatic tendency toward full employment as if they are "resource constraints".

Even the President has talked about "resource constraints". Who in their right mind could call 70% capacity utilization a constraint on productive equipment resources? Or 17% broad unemployment rates a constraint on labor resources?

The constrained resources are energy, and the language of deficit-hawk-lies that calls "money" a resource is used to prevent us from going all-in to develop our own domestic energy resources, as well as to tap the ability to increase the energy efficiency of long-haul freight by over 90%.

Posted by: BruceMcF | December 12, 2009 11:17 PM | Report abuse

Nearly no new private sector jobs created in the entire decade of the 2000's (most sent overseas) has deepened the hole we must climb out of.

Posted by: Pebble1776 | December 13, 2009 8:44 AM | Report abuse

THIS is what we had in '06 when Republicans held both houses of congress and the WH, and dim-0s were running for control of congress promising "CHANGE." How're yall liking the "CHANGE?"

2006 unemployment #s

Posted by: homefried1 | December 13, 2009 9:16 AM | Report abuse

Come on, Clinton never had both houses of congress in filibuster proof majorities. He had a hostile press (he just wasn't our type darling) because he and Hillary both had Arkansas accents and they didn't attend some supercilious soiree at Sally's house.
The press gave every nutty conspiracy aimed at them way too much air time.
Clinton had it much harder than the Dauphin Obama.

Posted by: teresainpa | December 13, 2009 11:34 AM | Report abuse

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