Private-sector leverage says that it’s not Bill Clinton
What’s your answer? “Thinking about the past few decades… to the best of your knowledge, which ONE of the following U.S. Presidents do you think did the best job of managing the economy?”
- Bill Clinton
- Ronald Reagan
- Barack Obama
- Lyndon B. Johnson
- George W. Bush
- Richard Nixon
That’s question #11 of the the Allstate-National Journal Heartland poll. 42% of the 1201 adults polled last month answered Bill Clinton.
I wonder why near half of those polled think that Clinton did the best job of “managing the economy”. Using one simple metric, private-sector financial leverage (accumulated dissaving), Clinton ranks among the top three worst economic managers, behind George Bush (Jr.) and Ronald Reagan.
The chart illustrates private-sector leverage as a stock of debt to GDP indexed to the start of each Presidential term. Therefore, the numbers are not the debt ratios, rather the appreciation of the debt ratios since the onset of each President’s term. The data are from the Fed’s Flow of Funds Accounts.
The sector financial balances model of aggregate demand posits that fiscal policy must shift in order to normalize GDP amid deviations of the private-sector surplus (desire to save) and the current account (see Scott Fullwiler’s article on the sector financial balances model of aggregate demand, which references similar work by Bill Mitchell and Rob Parenteau; or you can see last week’s answers and discussion to Bill Mitchell’s quiz for a simple outline).
When the private sector is levering up, the public sector is not doing its job. Since the 1990’s, the private sector loaded up on debt (ran private-sector deficits) in order to maintain GDP closer to full employment in the face of shrinking government deficits relative to those of the current account (since 1991 the current account trended down as a % of GDP). Deregulation, of course, contributed as well.
According to this metric, Barack Obama ranks highest to date, thanks to the automatic stabilizers and the ARRA. But we’ll see what happens when 2011 rolls around: the waning stimulus will drag economic growth; the Congressional tides may turn; and the immediacy of the crisis continues to fade. Unless firms start to “dissave” and pass on profits to households via hiring and wage growth, we may be in for a rocky ride, since the household desire to save will hover at very high levels for years to come (see David Beckworth’s post on the growing mismatch between mortgage debt load and real estate valuations).
What, no love for Nixon’s “Phases I-IV”?
I wonder why near half of those polled think that Clinton did the best job of “managing the economy”.
Oh, let’s see . . .
Real GDP growth per capita,
Real GDP growth per capita, net of debt,
Growth in real median income,
Real average weekly earnings,
Changes in employment and unemployment,
Growth in disposable income,
Growth in real net worth per capita,
Rate of home ownership,
Change in poverty rate,
Controlling health care cost, per capita.
Reduction in murder rate.
Clinton is no. 1 or 2 in each of these categories.
All from Presimetrics. of course. Thank you Mike and Mike!
Bruce, you’re missing the point. The Clinton policy of forcing budget surpluses WAS the problem. We had Asia running current account surpluses (keeping inflation low, by the way), while Clinton goes in and squeezes the liquidity (not to mention wealth generation) straight out of the economy; and all to “balance the budget”? Why did we need budget surpluses? There’s no evidence that a balanced budget is any better than one that is in deficit. In fact, over the last 79 years, the budget has been in deficit of varying proportions for 67 of those years. There’s a persistent need for budget deficits, and that’s because the private sector has a desire to net-save.
Bill Clinton wasn’t lucky – he squeezed the private sector of its saving. His policies are responsible for the leverage, and at least partially for the ensuing recession.
Hop into the Waybac Machine with me and lets go back to 1992 when wandering Willy first took office. Shhh, it looks like the newly elected president is having a meeting with The Fed Chairman Alan Greenspan.
Bill: Mr Fed Chief; How can I get the economy going again and lower unemployment?
Alan: Mr President, “The path to a beneficient future, is lowering the long-term trajectory of federal budget deficits.”
Sherman: That sure sounds like a threat to me Mr Peabody. If President Clinton holds to his campaign promises and spends to improve the economy, Fed Chairman Greenspan will keep Fed Rates high which will slow the economy and keep Unemployment high. It could keep President Clinton from being elected again.
Mr. Peabody: Right you are Sherman and President Clinton did heed Fed Chairman Greenspan’s advice. The Fed is independent of the government and President Clinton would have little impact. President Clinton was re-elected in 1996.
Sherman: Did it work Mr. Peabody?
Mr. Peabody: Yes it did Sherman. In fact by 1996, the economy was becoming too over heated and grew by 6% rather than the desired 2.5% and Unemployment dropped to 4.7% a number unheard of in those days.
Sherman: Well didn’t Fed Chairman Greenspan reverse his decision to keep Fed Rates low and increase them to slow the economy?
Mr. Peabody: No Sherman, Fed Chairman Alan Greenspan because he believe this expansion was different and was led by technological improvement giving the economy the ability to expand even further with little danger to the economy.
Sherman: Well what happened? That is a trip for another time Sherman.
I think you missed the point. But since you mention it, an “identity” suggests you can’t make the necessary distinctions to understand something as complex as an economy…. Sure glad to know the Clinton almost balanced budget was the cause of the recession that followed… er… both of them?. Too bad Bush’s unbalanced budget was too little too late.
I think I’ll file this one with Orszag’s “iron law of accounting,” and Cheney’s “iron law of demographics”
Rebecca is correct in her presentation. I just disagree with her choice of who was responsible. Clinton made a pact with the devil Alan Greenspan to keep Fed Rates low while he increased taxes. Without Greenspan, Clinton would have not gotten far.
Whoa Stormy, those are things we do not want to see/hear on a left of center blog. 🙂
BTW, welcome back. Everything OK? Ice forming on the lake yet? 🙂 🙂 (Yup! A double smiley face!)
Me and Alan Poe think an essay should contain all the material essential to its own understanding. You and Don Levit and MG think I have nothing better to do than search your sources to see if they say the same things you do, that is whether you misunderstand them, or they misunderstand reality.
Your accounting identidy fails to reconize that the economy is dynamic. No doubt those numbers mean exactly what you say they do at any given time, but since the whole point is that things can change… in fact we want them to change, i don’t see what you get by taking a snapshot. Indeed, it sounds as if you are saying that if the government doesn’t borrow the poor private sector will be forced to borrow, out of good citizenship no doubt, to keep the GNP growing.
No doubt they would. But I suspect that that private sector borrowing is what some would call “investment”, and apparently in times of high deficits, people are less willing to invest when they see the government borrowing more than they can see the growth in the economy paying for.
i am no economist. but i have less and less hope we can learn anything useful from economists who seem to think that ipse dixit is a sufficient argument.
Courageous post, Rebecca. Well done.
John Maudlin just did the identity thing too in his latest newsletter.
Here’s the identity for reference:
Domestic Private Sector Financial Balance + Governmental Fiscal Balance – the Current Account Balance (or Trade Deficit/Surplus) = 0
Mauldin’s hypothetical twiddling of the variables is little different than the usual Bill Mitchell, et all, spin. (and Greenspan too if a R is in office!). So Bill and sometimes Alan say that the USG has to issue treasuries so we have a way to save money! (or make money if you are a nimble trader)
Now that we have ZIRP, Bill and Alan can have the treasuries as far as I’m concerned. At this point I’d prefer round pieces of copper plated zinc with the likeness of Abraham Lincoln stamped on them, but I can’t think of anywhere to keep them. The money market will have to do I guess. Same problem overseas , so they are not much help either.
But then some of us wonder if we should get something for the government spending (call it dissavings so you can find the term in the variable above), let alone deficit spending so we have an ample supply of “same as cash” treasuries to buy.
Here’s the answer no one ever wants to talk about.
Excerpt from Mauldin:
“In fact, the US Infrastructure Report Card ( http://www.infrastructurereportcard.org), by the American Society of Civil Engineers, which grades the US on a variety of factors (the link has a very informative short video), gave our infrastructure the following grades in 2009: Aviation (D), Bridges (C), Dams (D), Drinking Water (D-), Energy (D+), Hazardous Waste (D), Inland Waterways (D-), Levees (D-), Public Parks and Recreation (C-), Rail (C-), Roads (D-), Schools (D), Solid Waste (C+), Transit (D), and Wastewater (D-).
Overall, America’s Infrastructure GPA was graded a “D.” To get to an “A” would requires a 5-year infrastructure investment of 2.2 trillion dollars. “
So that’s what accounting identities can do for us.
The interesting part is we had lots of personal and corporate debt accumulation during the ’90s. Then the government and personal debt growth continued another 10 years. Oil is now the majority of the trade deficit. The latest in vogue term is “balance sheet recession”. Looks like the Zero in the identity is trying to assert itself!
Mauldin ends the paper with the “competitive currency devaluation” scenario.
The philosophical question going forward is “If all currenies get devalued to zero, did any currencies really fall?”.
Stay tuned to the next decade to find out!
To flesh that out a bit, I think Reagan gets a partial by because of demographics. A young workforce goes out and buys a house and borrows to buy a new car. That is “natural” dis-savings on the part of the young consumer. Reagan directed government spending to the defense industry, to win the cold war of course, but the money did stay in the country mostly. So that’s still better than bleeding it out to Asia and the Middle East as we have been doing for a long while now.
Ya. We were Yuppies!
Under Clinton the banking sector was deregulated, allowing many of the abuses that brought about the credit fiasco.
Partially deregulated. The full monty came in 2003.
One thing I assume this analysis is ignoring is the difference between good leverage and bad leverage.
The Chinese are plowing 20% of their GDP into housing investment, but since this just pushing land values up not much wealth creation (either tangible or societal) will be yielded from this economic activity.
The 2000s featured a $6T household debt spiral where the tax cuts, lower interest rates, relaxed and/or ignored lending guidelines, special innovations in suicide loan products, and a new tolerance of widescale fraud pushed valuations to triple or more in many areas, resulting in a virtuous cycle of credit drawdowns -> household purchases -> higher incomes -> higher home valuations -> credit drawdowns . . .
Leverage in land value is NOT the same in leverage in new productive plant capital. The modern economic theory’s misapprehension of land as capital is its primary defect.
Also, judging Clinton from 1993 is deceptive. The economy was relatively crap from 1991-1994 or thereabouts, coming out of the previous land speculation boom (S&L crisis, ’91 recession)
The Dec 17, 1992 NAFTA treaty signing you are referring to was the ceremonial signing which had no force of law whatsoever.
Bush Sr. was unable to “fast track” NAFTA through Congress and sign it into law prior to the end of his term as President. The document was further modified before Clinton submitted it to the Congress for approval. Clinton signed NAFTA into law on Dec 8, 1993 and it went into effect on Jan 1, 1994.
sorry. that train has left the station.
don’t understand. it they are building houses, that is wealth creatioin.
Thanks, CoRev. No ice…yet…just balmy days…you know, global warming. Chuckle.
The GOP is a bit worse, in my opinion. Both parties have worked hard to sell out America. Obama, Chicago School, just will not stand up to China’s currency manipulation. See today’s Krugman.
The U.S. is hopeless and stupid….no plan…no understanding….
Government deficit reduction under Clinton bad, omg heaven help. The craze never stops.
you said what i said, but more better.
not being an economist, and having no idea what Rebecca said, I would have to guess that she has taken the idea that government deficit spending is at least sometimes a useful way to make up for private sector non-spending, and extrapolated it right off the table into a claim that lower government deficits are always bad for the economy. because as we know other things always be
equal. I certainly can’t see any mechanism by which private sector choices will load up on debt in the absence of government debt to maintain GDP closer to full employment, whether advertantly or not. Or any reason to suppose this would be a bad thing if they did.
The plan was developed under Reagan and Bush, but negotiation was not completed until Clinton. And then right before the treaties were signed, Clinton added his own three twists to it which made it a competely different Treaty then Reagan and (Bush I) had invisioned. Clinton takes the blame, it is his name on it. You can’t put it on Reagan and Bush if it was modified after they left, and their name isn’t on it!
Uh No again Troy…
Where is the specific peice of legislation that we refering to? The article of yours points to a symbolic gesture.
Judging Bush’s economy from 2001 is deceptive, never seemed to bother you!
when a physicist writes an equation he looks out the window and if his equation matches reality he is thrilled and happy.
when an economist writes an equation and people tell him it doesn’t match reality, he says, well, reality must be changed. when all the people are in skinner boxes we can eliminate the confounding variables and you will see the theory was right all along.
Depends on where they are building them.
“When the private sector is levering up, the public sector is not doing its job.”
Well, that is one interpretation, I guess. I do not think that the sectoral identity establishes causality.
However, Rodger Mitchell (see his blog, http://rodgermmitchell.wordpress.com/ ) has identified a recurrent pattern in the U S economy: Federal gov’t surpluses -> private sector leverage -> recession or depression. This goes at least as far back as Jackson’s paying off the national debt in 1835, followed by a speculative bubble and the depression of 1837 – 43.
coberly: “But since you mention it, an “identity” suggests you can’t make the necessary distinctions to understand something as complex as an economy.”
Yes and no, I think. The sectoral identity is essentially a conservation law, and physics does very well with conservation laws, thank you. 🙂 However, knowing that energy is conserved in a collision does not tell you exectly what will happen. It is a constraint.
In our current crisis, the private sector is saving. I do not think that Obama can claim credit for that. It is part of the natural history of financial crises. However. if you believe that it is a good idea for the private sector to save, then attempts to balance the Federal budget are the wrong policy, as they oppose private sector saving. Furthermore, running a high deficit facilitates private saving. (aside from the question of stimulus, although related).
However, you have people calling for both private sector saving and balancing the Federal budget. The only way that could work would be for exports to increase dramatically. Lots of luck there! Especially when, in a global depression. everybody wants to increase exports. The people who are calling for a return to private fiscal responsibility (reducing debt or increasing savings) should also be calling for increased Federal deficits.
does this explain the current recession? or are you saying that it’s really Clinton’s fault. I know there are people who would agree with you.
If so, we seem to have a tiger by the tail. Can’t cut the debt. Can’t pay the debt. Not even with cat food coupons.
well, i asked for it
so i linked. firefox blocked two pop up windows, but i got the picture.
thanks. that does look like “not wealth creation.” what were they thinking?
but it takes my system five minutes to look it up, so i would have preferred a thousand words.
A physicist would explain there are many ways to control private sector leverage (of the bad variety), but a macroeconomist will try and tell us it has only something to do with fiscal or monetary policy.
The macroeconomist will also tell you that we can pay the debt in cat food coupons, as long as they are American cat food coupons which the USG can print. This would not work if we owed Siamese cat food coupons because then we would need to deliver Chinese cat food priced in RMB to China upon redemption of the Siamese cat food coupons.
A corollary is that Greece is in trouble because there is no Greek cat food coupons or Greek cat food.
i understand Alan Simpson has a sale on cat food coupons. Printed in America, signed by the full faith and credit of the United States in disappearing ink.
You see, they been telling us for years those was “worthless iou’s.” Now they have to keep their premise.
This is interesting and reminds me that the way government spending is usually framed is misleading.