by Bill Clinton
At first, because we had a relatively small debt that was mostly held by Americans, the deficit spending led to significant job growth. It was like eating all the candy you want and never having to go to the dentist, though even then the income gains it produced were disproportionately concentrated in the top 10 percent of earners. By 1990, there was enough concern about the rapidly increasing debt that the Democratic Congress passed, and President Bush signed, a budget that began to do something about it. The most highly publicized features of the 1990 budget were a few modest tax increases and the so-called PAYGO rule, which required Congress to fund new programs either by cutting other spending or by raising revenue.
At the time, several moderate Republican representatives, including Minority Leader Bob Michel of Illinois, supported the bill. It was the right thing to do, a responsible first step. However, the antigovernment bloc in the House, led by Newt Gingrich, opposed the budget, using inflammatory language to characterize Republicans who voted for it and the president who signed it as traitors to the antitax cause and, in President Bush’s case, as breaking the famous “Read my lips: no new taxes” pledge he made in his 1988 speech to the Republican National Convention.
Though the budget passed, the fight over it was a political victory for the antigovernment forces. Among House Republicans, Bob Michel emerged weaker, Minority Whip Newt Gingrich stronger. And President Bush’s prospects for reelection lessened when he drew a vigorous primary challenge from Pat Buchanan, who harped on the broken “no new taxes” promise.
Though I was the ultimate beneficiary of the president’s misfortune, I couldn’t help feeling sympathy for his dilemma. He got the worst of both worlds. First, job creation virtually ground to a halt during his term, the inevitable consequence of what he had rightly called “voodoo economics” during his first run for president in 1980. By the late 1980s, the decade-long deficit binge had produced high interest rates, low levels of new investment, the erosion of manufacturing employment, and stagnant wages. Second, when President Bush agreed to sign the 1990 budget to begin turning things around, his party’s loudest voices condemned him as betraying the Reagan Revolution and weakening the economy. The antitax climate was so intense that in his acceptance speech at the 1992 convention, the president felt compelled to say he’d made a mistake in signing the tax increase and to pledge he’d never do it again. His antigovernment wing was demanding ideological purity, even in the face of evidence that trickle-down economics defied the laws of arithmetic and no longer produced jobs. They still wanted to eat candy and never go to the dentist.
When President George W. Bush took office, it was the first time antigovernment Republicans had held both houses of Congress and the White House. They could do whatever they wanted. It soon became clear that what they wanted were big tax cuts, less regulatory oversight, and higher levels of spending. To be fair, some increased spending on national security was inevitable after 9/11. But even afterward, they cut taxes again. It was the first time the United States had ever cut taxes while waging a war. The House Republican whip, Tom DeLay, actually said that in wartime, there is nothing more important than cutting taxes.
The PAYGO rule, which had done so much to ensure fiscal discipline, was scrapped, allowing the administration and Congress to enact both big tax cuts and big increases in spending on wars in Iraq and Afghanistan, on a new prescription drug benefit for seniors, on education through the No Child Left Behind Act, and on the world’s fight against AIDS and malaria through PEPFAR.
We did all this on borrowed money, increasingly from overseas, with China, Japan, the United Kingdom, Saudi Arabia, and South Korea buying the bulk of our bonds. Foreign governments now hold more of our debt than Americans do. China has more than 25 percent of the foreign holdings, at $1.2 trillion, with Japan not far behind at $900 billion.
What did we do with the money? We didn’t invest it in new scientific and technological research, in rebuilding our manufacturing base, in reversing our fall from first to twelfth in the percentage of young adults with college degrees, in creating the millions of jobs that would flow from a serious response to climate change. Instead, we consumed it, in ways that distort our economy today and cloud our children’s tomorrows.
From 1981 to 2009, the greatest accomplishment of the antigovernment Republicans was not to reduce the size of the federal government but to stop paying for it. As a result, the national debt more than quadrupled from 1981 through 1992, then doubled again between 2001 and 2009, even before the financial meltdown, which then required more government spending—the financial-system bailout, increased unemployment, food stamp, and Medicaid expenditures, and the stimulus—to put a floor under the downturn. At the same time, tax revenues declined as unemployment rose, businesses closed, and Americans spent less. Because interest rates are so low, it doesn’t cost much more to service the increased debt today, but when the economy picks up and there’s more private demand for money, interest rates will rise, and financing the debt will cost a lot more, leaving less money for investments in our future, including education, technology, research, and energy independence.
Click here to view a larger image. (Illustration credit 2.1)
Look at these charts. They show how our debt grew from 1981 to 2011; what would have happened if the tax system and spending restraints of the 1990s had been maintained over the last decade, compared with what did happen when we eliminated both; and how much spending and tax cuts under President Obama have contributed to the problem compared with the policies of President Bush.
Click here to view a larger image. (Illustration credit 2.2)
Essentially, the numbers demonstrate that after I left office, the president and Congress gave up a decade of surpluses in favor of doubling the debt. The charts also make the relentless attacks on President Obama as a big spender look a little lame when you compare the eight-year total cost of President Bush’s spending and the projected eight-year cost of President Obama’s initiatives. Stimulus spending will turn out about the same under both presidents. All told, the combined cost of the Obama spending increases and tax cuts is about the same as the costs of the wars in Iraq and Afghanistan and almost $400 billion less than the Bush tax cuts alone.
Click here to view a larger image. (Illustration credit 2.3)
While the decision to keep cutting taxes and spending more was driven by the antigovernment bloc that took control of the Republican Party in 1980, Democrats are not completely blameless. Some voted for both the Reagan tax cuts and more spending in the 1980s. Back then, some liberals simply didn’t think the deficits mattered, though they led to higher interest rates on small-business, home mortgage, credit card, college, and car loans. Only three Democratic senators voted against the tax cuts and for the spending reductions. One of them was Arkansas’s senior senator, my friend Dale Bumpers.
No one did enough to rein in escalating health-care costs, which rose at three times the rate of inflation between 1981 and 1993 and again between 2001 and 2009.7 And for too long, there was bipartisan support for the increasingly risky financial practices of the quasi-public mortgage agencies Fannie Mae and Freddie Mac, which eventually contributed to the severity of the financial collapse. In 2000, well before the agencies made large purchases of subprime mortgage securities from 2004 through 2007, my economic team went up to Capitol Hill to warn Congress that both Fannie and Freddie were overleveraged. They were told by representatives of both parties, many of whom had received generous contributions from the agencies’ executives, to go back to the White House.
I made some mistakes too, though not the ones I’ve been most widely criticized for: aggressively enforcing the Community Reinvestment Act (CRA) and signing the bill repealing the Glass-Steagall Act, the Depression-era law requiring commercial and investment banking to be done by separate institutions.
Conservatives blame the CRA, which requires banks to make loans in the communities from which they take deposits, for forcing banks to make risky mortgage lo
ans they wouldn’t have made otherwise. It’s true that my administration vigorously enforced the CRA requirement and that by the time I left office, more than 95 percent of the CRA loans made since the law was passed in the 1970s, more than $800 billion worth, had been made in the eight years I served. Of course, not all the CRA loans were for mortgages. Some were small-business loans, which are in short supply again today. And making mortgages available to people in the community didn’t cause the meltdown. One study found that CRA–compliant banks were actually less likely to fail during the financial crisis than banks that shipped more of their deposits out of the community in hopes of getting higher returns elsewhere.
Many progressives believe the mortgage crisis was hastened and enlarged by the end of the division between commercial and investment banks. I’ve seen this argument in print dozens of times without supporting examples, as if it were self-evident. It isn’t. Many purely commercial banks made bad mortgage loans and failed. The first bailouts went to an insurance company, AIG, and Bear Stearns, an investment bank with no commercial operations.
By the time Glass-Steagall was repealed, Federal Reserve rulings, beginning in the late 1980s, had already eliminated restraints on big banks’ ability to engage in both commercial and investment banking activities, except for restrictions on underwriting insurance. The real problem was that both before and after I signed the bill, the Securities and Exchange Commission (SEC), which oversees investment banks, lacked the authority to require them to set aside more cash to cover high-risk investments (though there were other steps a vigorous SEC commissioner could have taken to reduce the risks of a crash), and the bank regulators didn’t do enough to limit commercial banks’ risky loans.8
At any rate, now federal regulators do have the authority to limit leverage under the financial reform bill, and two big investment banks, Goldman Sachs and Morgan Stanley, have decided to become bank holding companies, and therefore subject to cash reserve requirements.
The best argument against repealing Glass-Steagall is that it may have accelerated the speed of bank consolidations, which were already well under way, encouraging banks to get bigger, faster. Some believe that big banks are less inclined to make small-business loans than community banks.
I do think I can be fairly criticized for not making a bigger public issue out of the need to regulate financial derivatives. I couldn’t have done anything about it, because the Republican Congress was hostile to all regulations, going so far as to threaten to leave the SEC with no budget because the commissioner, Arthur Levitt, was vigilant in doing his job. But I should have spoken out more, especially after Congress included a measure barring financial derivatives from being regulated as securities or commodities in an appropriations bill that passed by a veto-proof majority. In not doing so, I ignored one of my own rules: even when you can’t win, it’s best to get caught trying.
Brooksley Born, head of the Commodity Futures Trading Commission, did say that financial derivatives should be subject to the same kinds of capital and transparency requirements as agricultural derivatives. In 2010, her position was vindicated when Senator Blanche Lincoln, chair of the Agriculture Committee, passed an amendment to the financial reform bill to require financial derivatives to be traded more like agricultural ones. It had to be done. After I left office, the unregulated financial derivatives markets increased sevenfold in just seven years, to $700 trillion, including the newly invented vehicles that contributed to the crash. The nation’s laws and regulations weren’t updated until 2010.
Whatever our shortcomings, because Democrats, whether conservative, liberal, or moderate, basically believe government has an important role to play in our lives, they want it to work well. That makes most of them less ideological and more open to policies that have both progressive and conservative elements than their antigovernment adversaries.
For example, under President Reagan, the Democratic Congress actually approved slightly less spending than he asked for, by increasing domestic spending a little less than they reduced his requests for defense spending increases.9 Under the first president Bush, they passed the PAYGO rule. When I was president, we passed the 1993 budget to reduce the deficit by $500 billion, roughly half from spending cuts, half from tax increases, with only Democratic votes. The bill produced a much greater reduction in the annual deficit than experts predicted, eliminating roughly 90 percent of it even before the Balanced Budget bill was enacted, because it led to lower interest rates, more investment, and higher growth, which brought in more revenues and reduced costs as more people got jobs and left government supports behind. Many Democrats voted for the welfare-reform bill after we persuaded the Republicans to restore the federal eligibility for food stamps and medical care for welfare recipients and their children. Most Democrats voted for the Balanced Budget Act of 1997 and the subsequent ones that allowed us to pay down $452 billion on the national debt.
The debt would have been reduced by even more, had it not been for the big tax cuts, spending initiatives, and brief recession in President Bush’s first year in office, which included the final eight months of my last budget. If the tax rates and spending restraints of the 1990s had been kept in place, and the economic crisis had not occurred, the United States would have paid off its entire public debt by 2013 for the first time since 1832, perhaps a couple of years later because of the cost of going after al-Qaeda in Afghanistan. Even if the financial crash had happened, it would have been much easier to handle and would not have cast such a shadow over our future. And we could have financed a larger stimulus with less controversy and a smaller burden on our future.
In 1993, Democrats did raise taxes on upper-income Americans and large corporations but also cut them on lower-income working families and later, in legislation with bipartisan support, voted to cut them on middle-class parents with children, parents who adopted children, and families paying for higher education, on income from capital gains, and on investments in areas of high unemployment. We strengthened regulations to clean the air and water and ensure the safety of our food. And Al Gore’s Reinventing Government initiative not only eliminated sixteen thousand pages of regulations, it also ended unnecessary programs, improved others, and changed government procurement and other practices to improve performance and save money.
Once the antigovernment bloc in Congress realized, in early 1996, that it would take another election victory to repeal the tax increases in the 1993 budget or to eliminate or severely reduce the government’s role in education, economic development, health care, environmental protection, and several other areas, we worked together to reform the government’s role so that it could serve the American people in the new reality of the twenty-first century.
If you look at what has actually happened in America over the last thirty years, it’s clear that the idea that government is the cause of all our problems is wrong. The idea that there’s no such thing as a good tax or a bad tax cut, and no such thing as a good regulation or a bad deregulation, is wrong.
So is the idea that there’s no such thing as a good program or a bad program cut. For example, in 1995, the Social Security Administration (SSA), in an independent study by Dalbar Inc., was rated as having the best telephone customer service among a group of world-class companies, including FedEx, L.L.Bean, Southwest Airlines, and Disney. In 2000, SSA received recognition for its innovative and sophisticated customer service approach from CIO magazine as a CIO 100 honoree, the only major federal agency on the list, along with major corporations like Amazon.com, Intel, Ford Motor Company, and Marriott International. In 2011, the Veterans Administration (VA) became the first hospital system in the nation to order and implement simple, uniform sterilization procedures to prevent hospital infections, which cause tens of thousands of deaths and add tens of billions of dollars to our health-care costs every year. Though there have been a few cases of infection in VA hospitals caused by equipment not properly sterilized, the rate of infections has been reduced dramatically. Medic
are and Medicaid have far lower administrative costs than private insurance companies. Led by for-profit insurance companies, our health-care system spends about eleven cents on the dollar more on paperwork and administration than any other wealthy nation. That’s more than $200 billion a year.
The Federal Emergency Management Agency (FEMA), which was roundly criticized after Katrina, was probably the most popular department in the federal government during my administration because the director, James Lee Witt, had a strong background in emergency management, put together a first-rate professional staff, and instilled an ethic of speed, service, and compassion up and down the line. Ron Brown was a very highly regarded commerce secretary because he supported companies’ efforts to become more productive, recognized them for doing so, and devoted the resources of his department to helping them sell more American-made products around the world. Mickey Kantor and Charlene Barshefsky were good trade representatives because they negotiated and implemented a total of three hundred new trade agreements and supported strong enforcement of the provisions of those agreements that protect American economic interests. As secretary of the interior, Bruce Babbitt was widely praised for protecting irreplaceable areas and operating a national park system that has been emulated by nations all over the world. Government doesn’t always mess everything up. It can be worth what you pay for it.
To get America back into the future business, we’ll have to make choices and changes in both our government and our private economic practices. To create jobs and raise incomes; to create new businesses and restore our manufacturing base; to have a finance sector that both earns money for itself and promotes a strong economy; to save ourselves and our children from the ravages of climate change in a way that increases growth and broadens prosperity; to move back to a balanced budget—these tasks will require the best ideas of conservatives, liberals, and moderates, Democrats, Republicans, and independents.