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.
Obama really needs to be running larger deficits to correct for the past imbalances…ie, to unwind the private sector debt built up during the clinton / bush years…
(just clarifying)
Good clarification RJS. I was really amazed when I looked at this data at how big a gap between the budget deficit and trade deficit there was. In 2007 it was about 5% of GDP, then calamity. I might note also the gap in 1999-2000 was about 5% of GDP, then recession. In both scenarios this is where the trade deficit exceeds the budget deficit as a % of GDP.
Here are some good posts from Dean Baker on the trade deficit issue and accounting identities.
Here are some good posts from Dean Baker on the trade deficit issue and accounting identities.
One
Two
Three
I was mildly amused by the first sentence of this post… “First, we start off with sectorial balances.”
If Mr. McOsker is going to expound on EVERYthing Bush II & Clinton got wrong economically, this is going to be a looooong series.
And I’m looking forward to it!