Roger Altman, a senior economic advisor to the Kerry campaign and the deputy Treasury secretary during the first Clinton administration, foisted this preposterous idea on the editorial pages of the Wall Street Journal: Democrats are better for business. To avoid the label of “economic day trader” (he has been touting how poorly the economy has been doing the last three months), he produced his “long-term” economic proof statement by touting how much better the economy performed under Clinton than under Bush. In doing so, Altman attributes the Clinton economic good times to Clinton.
That’s kinda like saying the guy who just won the lottery is really good at picking numbers.
In one sense, Altman lauds Clinton’s tax increase of 1993 as a prudent step in reducing the budget deficit. Fortunately, the electorate — which refused to endorse the tax-increase proposals of both Mondale and Dukakis — turned on Clinton for raising taxes in midterm elections. Democrats were demoralized when not one incumbent Republican in either the Senate or the House lost their seats in 1994 and the Republicans gained control of both the House and Senate.
After his tax-hike mistake, Clinton reverted to a centrist strategy. He approved capital-gains tax reductions as well as a move forward on increasing world trade. The change in strategy contributed to economic growth, but the policy actions mirror those of President Bush, not candidate Kerry.
The other farcical notion promoted by Altman is that Clinton actually knew what he was doing when it came to closing the budget deficit. Take a look at the forecasts for budget deficits in President Clinton’s annual report of 1995. With the able assistance of Laura Tyson, the president’s economic team forecast a budget deficit for the balance of the 1990s that was just about unchanged from the level in 1994. As the following chart depicts, the actual budget ballooned to a surplus in 2000. This was likely due to the technology bubble, Y2K spending, the capital-gains tax cut, and improving world trade.
In any economy, there are always positives and negatives. So proponents of the economic policies of either presidential candidate can always point to statistics that either corroborate or undermine those policies. I’ll take this liberty to point out more indicators that make the case for the economic policies of George W. Bush.
Over the past four years, the Wall Street Journal reported that the dollar value of outstanding mortgages has quadrupled. This rise reflects many things — all good for the average American who either wants to own a home or already owns one.
Record-low interest rates have fostered record-low mortgage rates, allowing many more average or below-average income Americans to qualify for home loans. Americans have benefited from the low-interest-rate policies of the Bush administration in many ways: by refinancing their current mortgages at near-record low rates, thereby increasing their standards of living; by buying first homes because interest rates were at record lows; or by selling their homes at record prices in a booming housing market. All this occurred when inflation was near historic lows! Not many economists are preaching these positive relationships, which are all favorable to the president.
Contrary to consensus beliefs among Democrats, the current budget deficit has saved us from the possibility of a much more serious recession, or even a depression, given the heights to which speculation went in the stock market advance of the late 1990s. Budget deficits provide a safety net by triggering economic activity through government spending when other sectors of the economy are faltering. President Hoover tried to tax and save his way out of the Great Depression only to exacerbate it. Promises by both candidates to shrink the deficit may tend to trigger economic malaise and slow activity, not benefit the economy.
My belief is that the Clinton budget surplus was an important contributor to the post-Clinton recession in 2001. The government surplus was actually undermining the economy at a time when the technology bubble was bursting. Collapsing private savings by liquidating government bonds to pay higher taxes is hardly a recipe for a prosperous economy.
Roger Altman’s analogy of the budget-balancing responsibility of corporate CEOs confuses microeconomics with macroeconomics. Corporate America has a limited check-writing capability, and an overextended corporation can run into problems with creditors. The federal government has no such limitations. Since Richard Nixon took us off the gold standard in 1971, there has been no limit to the federal government’s ability to write checks. There is no creditor that can impose its will on the federal government. To the extent that foreign governments hold billions of dollars in government bonds, their only claim is to having their bonds redeemed in dollar deposits at the Federal Reserve. The constraints on government check-writing are political, not operational, and the penalty for too much deficit spending is inflation, not insolvency.
In his editorial, Altman makes the following statement: “In the long run, they [deficits] represent a claim on national savings which reduces the availability of funds for private investment.” In a financial context, this statement is tantamount to saying the world is flat. For example, as a matter of accounting, loans create deposits, not vice versa, so there is no such thing as a shortage of funds. When the federal government writes checks, non-government net financial assets necessarily go up by exactly that amount. This spending stimulates the economic activity that leads to expansion and increased real savings.
The chart above tracks the budget deficit or surplus as a percent of GDP and the economy. Since 1930, the U.S. economy has basically operated with annual budget deficits, yet we have become the world economic and military power simultaneously. Now, tell me again, How do budget deficits undermine long-term growth?
President Bush understands the importance of lower tax rates in stimulating economic activity. He reflects the understanding that Presidents Kennedy and Reagan had when they lowered tax rates on the highest income earners (not the wealthy). They realized that, as Kennedy said, “a rising tide raises all boats.” Altman economics espouses raising tax rates. This is just like — you guessed it — Hoover in the 1930s and Nixon in the late 1960s.
History records that such tax increases led to economic catastrophe, yet the polls are telling us that almost half of voting America are panting to raise taxes on those earning over $200,000 per year (or $146,000, if one examines Kerry’s proposals closely). The problem, as many Republicans have pointed out, is that such a tax increase will undermine the entrepreneur who earns a living and hires others to build a business. Meanwhile, Kerry’s proposals won’t affect the rich who can hire lawyers and accountants to shelter their income (like Teresa Heinz Kerry has done).
Finally, Altman points to an increase in corporate supporters of John Kerry. Maybe he should survey those companies that get taxed at the personal rate and will have to pay a higher rate under Kerry. Isn’t it ironic that the Democratic strategy of simultaneously raising taxes on those workers earning over $200,000 and increasing employment will undermine the one segment of the economy that is given credit for job creation?
While Altman points to such financial statistics as higher real median income and real business fixed investment as better in the Clinton years than in the Bush years, he fails to point out that it was the budget deficits of the early ’90s that provided the net financial equity for the subsequent growth. Even with a terrorist attack on our country and related economic chaos, corporate America’s cash hoard approximates $500 billion, easily an all-time record. To the extent that Altman compares an after-tax return of 3.9 percent under Clinton to 2.5 percent under Bush, one should not forget to adjust Altman’s select statistics for inflation. Low inflation under the Bush years is probably the most important economic variable that is contributing to economic stability.
The Bush administration’s policies of lowering tax rates, fostering low interest rates, and protecting the U.S. from terrorist attacks through increased defense spending lays a better groundwork for an improved business environment than higher tax rates, uncertain spending on defense, increased spending on healthcare, and all the other related liberal strategies of John Kerry.
– Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc. and chief investment officer for Victoria Capital Management, Inc.