What Bush II and Clinton Got Wrong On The Economy

Reader Matthew McOsker writes:

What Bush II and Clinton Got Wrong On The Economy

First, we start off with sectorial balances. Trade deficits must be offset by government and/or private deficits. For example, if we had a $50 billion trade deficit, then that needs to be offset with a $50 billion government deficit. Otherwise, the private sector will be driven into debt, which is not as sustainable long term.

Let’s look at the Bush years in the accompanying chart. Trade deficits far exceeded budget deficits, and grew quite large. As those trade deficits grew as a % of GDP, the budget deficit was shrinking. I think we know the net effect as the private sector was driven further into debt – real estate related debt, which unraveled in 2008. Now going back a little further, this condition also existed under Clinton though to a lessor extent.

Both presidents should have run larger deficits to keep the sectors in balance. This could have been achieved through some combination of policies that either lowered the trade deficit, and/or increased spending, and/or tax cuts. Needless to say they both got it wrong, and Obama’s stimulus spending was the correct move to begin to get the sectorial balances back in check. However, Obama really needs to be running larger deficits to correct for the past imbalances.