- The Washington Times - Tuesday, March 21, 2000

Seven years ago last month, President Clinton proposed a federal budget and economic strategy containing historically large tax increases. According to the president, this budget policy of 1993 lowered long-term interest rates and boosted U.S. economic growth.

The administration's explanation of the linkage between its policies and lower interest rates has been remarkably consistent and repeated many times. For example in the 1999 Economic Report of the President, Mr. Clinton asserted of the effects of his 1993 budget: "Our new economic strategy was rooted first and foremost in fiscal discipline… . The market responded by lowering long-term interest rates." The administration's claims that its budget policies are responsible for the current economic prosperity are based entirely on the assumed decline of these interest rates.

The problem with this view of events is that interest rates and the economy did not respond as portrayed by the president and other administration officials. For example, we know that the linchpin of the administration argument interest rates moved up, not down, after the 1993 budget bill. Long, medium and short-term interest rates all shot up soon after the Clinton budget was enacted in August 1993. By July 1994, the yield on a 30-year Treasury bond had risen to 7.6 percent from 5.9 percent in October 1993. By November 1994, the rate had risen to a little more than 8 percent. This upward movement in interest rates demonstrates that the Clinton administration's explanation for the health of the economy is factually wrong.

The true sequence of events was that interest rates had been falling from mid-1991 until the fall of 1993, reflecting a decline in inflation. This downward drift in interest rates ended shortly after the enactment of Mr. Clinton's budget. Instead, interest rates started to climb higher. The administration's claims to have invented the economic expansion are no better founded than Al Gore's claims to have invented the Internet.

Two important features of the 1993 budget are always worth remembering. First, one of the largest tax increases in U.S. history fell largely on small business owners and thus would not stimulate the economy. This tax increase proposal was economically counterproductive, and the attempt to impose household energy taxes also went against Mr. Clinton's campaign pledge of a middle-class tax cut. It should be added that hailing a tax increase of this magnitude as key to stimulating economic growth is not consistent with any coherent body of economic thought. Second, the 1993 budget did not balance the federal budget and lower interest rates, thus stimulating the economy, as argued by the administration.

As we have seen, the administration argument is factually wrong with respect to interest rates and reverses cause and effect. The ongoing economic expansion flooded the Treasury each year with revenue much faster than the administration projected, erasing the deficit and pushing the budget into surplus.

The strong economy and financial markets had a huge impact on the budget situation; only by ignoring the economic expansion can the budget tail be thought to wag the economic dog.

The business cycle upswing was already well underway when the Clinton economic plan was being debated. The current expansion started in the second quarter of 1991, nearly two years before Mr. Clinton was sworn into office; and even more time elapsed before his budget policies took effect relatively late in 1993.

For the record, despite much controversy, during 1993 there was actually little partisan disagreement with the view that the economic impact of the 1993 tax increase and budget would be negative. Both Democrats and Republicans publicly expressed concerns about the effects the Clinton economic plan would have on the economy.

Consider what Democrats on the Joint Economic Committee (JEC), including Sens. Kennedy, Sarbanes, and Dorgan, and Reps. Obey, Mfume, and Wyden said in the 1993 JEC Annual Report. According to them, the Clinton budget plan "will continue to exert downward pressure on economic activity through the next five years." Officials within the Clinton administration also agreed with this assessment. Shortly after the enactment of the Clinton budget in August 1993, administration economists lowered their economic growth numbers for 1993 and 1994. This is one of the reasons the deficit forecast did not improve (the other being projected spending by the Clinton administration).

Ultimately, although the budget did not help the economy, the sustained economic expansion did generate a flood of revenue that balanced the federal budget and pushed it into surplus. As I have said many times, the credit for the economy belongs to the hard-working American people in all walks of life. To the extent policy factors are important, the primary credit should go to the Federal Reserve. The Federal Reserve squeezed inflation out of the economic system, and this lowered interest rates as well as unemployment.

None of this takes anything away from the Clinton's administration's real contribution to economic policy. The administration did not interfere with Alan Greenspan's anti-inflation policy that laid the foundation for the sustained economic prosperity. Its continuation of the traditional executive branch commitment to free trade, and later work with the Congress on restraining federal spending, had positive effects on the economy. However, arguing that the 1993 Clinton economic strategy lowered interest rates and boosted the current economic expansion is factually wrong, as the evidence demonstrates. The current economic expansion began in 1991, and had little, if anything, to do with presidential economic management. The business cycle upswing was sustained by successful Federal Reserve policy and the hard work of the American people. Our country is blessed by great economic prosperity not because of tax increases and government manipulation of the economy, but because hard work and innovation are still rewarded in America.

Jim Saxton is vice chairman of the Joint Economic Committee.



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