Dean Baker Reduces Uncertainty

Clinton's Surpluses Were Due to the Stock Bubble by Dean Baker

The huge surpluses of the last Clinton years were the result of a boom that was driven by a stock bubble. The boom was great. Millions of people got jobs who would not have otherwise. We also saw real wage gains up and down the income distribution for the first time since the early 70s.

The greatest minds in the economics profession had assured us that the unemployment rate could not get below 6.0 percent without touching off accelerating inflation. However the boom pushed the unemployment rate down to 4.0 percent as a year-round average in 2000. Guess what? There was no story of accelerating inflation. (Fortunately for economists, continued employment, and even standing in the profession, does not depend on performance.) 

But the key point is that the surplus came from a boom that was not sustainable. Here's the key chart that shows you how we went from the deficit of 2.7 percent of GDP that the Congressional Budget Office had projected in 1996 for 2000 to the surplus of 2.4 percent of GDP that we actually saw in 2000.

This was not a story of tax increases and budget cuts, those had already been on the books by 1996. This was pure and simply a story of the bubble-based boom pushing the economy much further than CBO had expected. (Greenspan deserves a huge amount of credit for allowing the unemployment rate to fall. His Clinton appointed collegues, Lawrence Meyer and Janet Yellen wanted to raise interest rates in 1996 to keep unemployment from falling much below 6.0 percent.)

[(EDITED: Baker mentions 1996 which I somehow missed. The Russian default was in 1998 so I must be confused about this.) Supposedly Greenspan lowered rates because he wanted the Fed to act as the lender of last resort during the Russian default. The hedge fund Long-Term Capital Management failed because of the default. The international scene was a mess even if the U.S. had 6 percent unemployment. N.O.]

Anyhow, when the bubble burst, the surplus was destined to vanish. The Bush tax cuts and even the wars helped to stimulate the economy and maintain employment. There were much better ways to boost the economy, but it is absurd to imagine that the economy somehow would have been better off without this spending.

To repeat a post from last week, the real tragedy of both conventions is that policy is so obsessed with the deficit....

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Is the Economy on the Mend? by Krugman

Between debt repayment, defaults, and — since recovery began in mid-2009 — rising income, the US has made a lot of progress in deleveraging. Add in the fact that we’ve worked off the excess construction from the Bush years, and there’s a pretty good case that the stage has been set for a much stronger recovery over the next few years. 

Even if that’s true, by the way, inadequate stimulus and debt relief have inflicted huge, gratuitous suffering. But the case that we have been healing all the same is pretty good.

Might be a better jobs report tomorrow. The ADP Employment Report had a good number today.