The rooster always takes the credit
By Charles VanEaton, Ph.D.
"The rooster always takes credit for the sun's rising." I didn't coin that phrase, but I applaud whoever did because, surely, he must have had President Bill Clinton in mind -- not only in comments about the course of the economy now, but in regard to the prospect of a federal "surplus" now faintly seen on the horizon.
Though he campaigned during 1992 on the argument that the U.S. Economy was in the worst shape it had been in 50 years, a simple look at data published by the Federal Reserve Bank shows that, in truth, while he was campaigning, the economy, except for a brief downturn lasting no more than three quarters from June 1990 to March 1991, had been expanding since 1983. When President Clinton entered the White House in January 1993, he inherited not the worst economy in 50 years, but an economy still moving upward from the days of stagnation which characterized the late 1970s; and an economy which had sufficiently restructured during the 1980s to be poised for continued strong growth in the indefinite future. In fact, if one is inclined to give credit for the performance of an extremely complex economic system to whoever happens to be sitting in the Executive Office at any moment in time truth would show that, except for the last quarter of 1997, the economy has expanded no faster on the current president's watch than it did over the long period 1983-92 -- and that even accounting for the brief downturn which served to weaken George Bush's chances for reelection in 1992.
All this is simply for background. What needs to be considered -- though, given the peculiar character of the way Americans see the role of the White House in "managing the economy", I know it will not -- is whether the president, any president, has all that much to do with the overall performance of the economy under any circumstances. In general, a sitting president, acting alone, has little to do with how our economy operates. All a setting president can do, in concert with a willing Congress, is to make sure that no policies are generated which might impede an economy's smooth functioning and upward trejectory. Doing only that is not doing nothing -- it is doing the long-run right thing.
Shortly after President Clinton entered office in January 1993, an extremely insightful article appeared in The Atlantic Monthly -- scarcely a journal friendly to conservative views -- entitled "It's Not the Economy, Stupid." The author pointed out, correctly, that the nature of a vast economic system built on systems of freedom of exchange and reasonably well-defined private property rights is far too complex to be guided by a president -- any president. Instead, he argued, it is a system of prices and incentives generated by market forces which yields the various periods of economic expansion and contraction which have characterized the U.S. economy for as long as the issue has been studied. Indeed, the dynamic of our economy is such that it can best be understood by application of new tools derived from that branch of mathematics which now passes under the term "Chaos Theory" -- not from the old tools of political grandstanding.
But presidents will take credit when the economy is expanding and will try to deny blame when it's not. That's the nature of the political animal. Conservatives, I shall be the first to admit, are not exempt from this habit.
In mid-1981, Senator, now Majority Leader, Trent Lott was the principal guest on one of those Sunday television programs which allow reporters to question political leaders. I don't remember which program it was, but I do remember the question and Lott's response. In fact, I wrote an article about it immediately following. The reporter asked Lott if the Republican president was not to blame for the economic downturn which was under way. He denied the Administration's blame for the down turn, but took credit for the falling rate of inflation which was part of the down turn.
Lott was wrong. The down turn -- the blame for which he was trying to reject -- was the result of action taken by the Federal Reserve Board of Governors in the quarter prior to President Reagan entry into the White House. The Fed had aggressively moved to reduce the rate of growth of the money supply from its unsustainable 20% compound annual rate of expansion over the year 1980 to a zero rate of growth during the first half of 1981. Every economist of whatever political stripe knows that an economy operating on the belief that inflation (always and everywhere a product of excessive monetary expansion) will continue will go into a tail spin when those beliefs are no longer capable of being confirmed once monetary expansion has stopped. Such a rapid monetary growth contraction forces enormous cost restructuring and supplier-labor recontracting on the entire economy. Such forced recontracting is the essence of a recession -- as is moderation in the rate of inflation. In a word, and despite Lott's empty answer, it was the Fed, not the White House, which acted, correctly, to end the exponential growth in inflation and, responsively, force the economy to go through a period we officially call a recession.
The White House Lott defended was not to blame for the recession. Neither was it responsible for the fall in the inflation rate -- a fall then correctly called "disinflation." Lott's failure to offer that small economics lesson to the reporters on that day long ago was, unfortunately, representative of how the political class tends to address the overall level of an economy's performance even now. Now the economy is continuing to expand -- the product of intense continuing attention paid by the Fed to a system of monetary policy aimed at keeping inflation in check and the powerful growth-enhancing economic restructuring which went on in the 1980s. And, again, as always, the political class if trying to take credit for things with which they have had little to do.
We may see the federal budget approaching some form of surplus. I say "some form" because of the oft-misunderstood way government budgets are calculated. (Government budgets are not directly comparable with the budgets recorded by private-sector, for-profit, entities. Governments use the rules of Fund Accounting. Private entities use the tools of Financial Accounting. A government can claim surplus if one fund is receiving revenues in excess of current outlays greater than other funds are operating in deficit. Essentially, one fund "loans" its excess current receipts to other funds which are in shortfall. On a true balance-sheet basis, the federal budget has present and future debts far in excess of current and expected future revenues. Indeed, if the federal debt held in the Social Security fund plus the growing range of federal "unfunded" liabilities were added to our current outstanding federal debt, the federal balance sheet would show debt in excess of assets of as much as $13 trillion (that's trillion, not billion. We're talking about real money here.)
But the White House is ready to take credit for the "surplus." So also, is the Republican Congress. Taking credit, remember, is what the political class does quickly. Taking blame is unheard of. Shifting blame is.
So, playing the "taking credit" game, who's credit is it? Is the possible soon-to-come "surplus" to be credited to the Administration or to Congress?
The coming `surplus" has caught everyone by surprise. All the budget talk in early-1997 was based on the presumption that, on a base-line adjusted basis, bringing pressure to bear on present and projected spending proposals, would still bring no deficit relief before the year 2002. However, after a hard- fought budget agreement was finally wrenched out of the White House by the Republican Congress, and after new revenue data began to appear, the goal of budget balance looked increasingly probable at, if not before, 2002. Now, new revenue data have emerged to suggest balance earlier and `surpluses" sooner than 2002. Writing in the July 24, 1997 Wall Street Journal, Harvard University economist Lawrence Lindsey, a former Federal Reserve Board governor and current American Enterprise Institute fellow, asked "Where did this extra revenue come from?" He answered that this unexpected revenue surge is not coming from a booming economy per se because the overall level of economic activity is in line with what had been projected when Congress wrested a balanced-budget agreement from a reluctant White House. Corporate income taxes were in line with what had been forecast. Social Security receipts (which cover the shortfall in the rest of the budget) were also in line with projections. Consequently, the surprising rise in federal receipts could not be attributed to rising employment levels. The entire revenue gain, Lindsey argued, was coming from "nonwithheld" income tax payments -- meaning people settling up on April 15. There can be only two sources of such unexpected revenue gains: capital gains taxes and labor income in the form of big bonuses or unexpected profits by entrepreneurs.
Investors, Lindsey believes, are currently sitting on around $5.4 trillion in unrealized capital gains. Last year a substantial cashing in of gains gave an unexpected boost to federal revenues. And, unless the capital gains tax rate is soon reduced, this one-time revenue source will stay locked up. Consequently, the current boasting about "budget surpluses as far as the eye can see" may be nothing more than "spitting into the wind". Unless there can be a repeat of this unexpected revenue gain -- a repeat which a cut in the capital-gains tax rate could expedite - -- the path of revenue growth will surely fall back to levels expected in last year's budget deal which projected no "surpluses" before 2002.
The coming "surplus" is simply not an indication of new budget discipline in Washington. The real attitude toward the future path of federal spending has been exhibited by President Clinton's current call for massive new spending on programs which define what he truly is -- a "Family Security Liberal" who really believes that all those old failed programs aimed at making it possible for everyone to enjoy the "good life" via federal programs failed only because not enough money was spent. He intends to spend it because the so-called "surplus" is out there to be spent.
But the source of new revenues is not all that secure. It is not coming exclusively from the sustained revenues from a growing economy. (Unlike the political class, no sensible business would plan new spending based on unexpected windfall revenue gains in one year.) Moreover, there can be no guarantee that the economy will continue to expand at current rates. All that can be done to secure any chance of future excesses of revenues over outlays is serious budget discipline now -- not later but now. If there was ever a time when fiscal conservatives need to take charge is is now. If not, all the talk about "surpluses as far as the eye can see" will give way to what we have known in the past -- deficits, genuine deficits, as far as the eye can see.
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