Asymmetrical Information

AMEN! And if I could figure out how to trackback when I link to your great assessment on my own blog, I would! Bravo!

Lessee, looking at the conclusion of the paper that Kling talks about:

(http://www.ksg.harvard.edu/cbg/Conferences/economic_policy/elwrevisedcbg.pdf)

Page 81:

"The tax increases and spending disclipline imposed by the 1990, 1993 and 1997 budget deals played a significant part in this improvement in the budget picture, as did the restraint of the Congress and the President from enacting tax cuts or spending increases that would have dissipate the incipient surpluses. But good luck in the form of a strong economy also was important. And the impact of the initial policy decisions on the subsequent economic performance should not be discounted.."

"While the Clinton Administrations fiscal policy helped to bring the budget deficit under control and reduce the level of debt to GDP from 50 percent to 5 percent, the Administration was only partiall able to lock in fiscal discilpine for the future....Bu the Administration's attempts to preservve the budget surpluses to help solve the entitlement problem ended in the failure as it took the subsequent Administration less than six months to dissipate much of the surpluses by passing a large consumption-orientated tax cut."

Sound to me that the authors of the above paper have a radically different view from yours, Megan; and that they suspect some of the unexpected strength in the economy came from policy decisions in the early 1990s.

I have a lot of respect for Kling, but, he's is complaining about "fundamental attribution error", then maybe he should check for it in papers he references.

Also, from 1993-1997, 50% of the change in projected surplus projections was from policy. Not insignificant.

Tom, the bulk of the surpluses came after 1997, and the Clinton team's overall contribution to those was dwarfed by the economy.

Clearly, fiscal policy can have an effect on the size of the deficit; that's a trivial observation. But that's not the same as, first, claiming that the Clinton team caused the surpluses, which they mostly didn't; and second, that the surpluses were mostly responsible for the economic boom, which is confusing cause and effect.

jane wrote:

"Tom, the bulk of the surpluses came after 1997, and the Clinton team's overall contribution to those was dwarfed by the economy."

But that is a different claim from the claim that policy intervention was ineffective. The conclusion of the paper (which Kling praises and cites) gives a rather different picture of the effectiveness of policy in the early 1990s.

"Clearly, fiscal policy can have an effect on the size of the deficit; that's a trivial observation. But that's not the same as, first, claiming that the Clinton team caused the surpluses, which they mostly didn't;"

The strength of the economy post-1997 caused the relative effect of the policy changes to diminish. That does *not* change the fact that in 1997, the improvement in the projected surplus forecast was 50% due to policy changes.

" and second, that the surpluses were mostly responsible for the economic boom, which is confusing cause and effect."

Take it up with the authors of the paper, when they say: 'And the impact of the initial policy decisions on the subsequent economic performance should not be discounted.'.

Seems rational to me; projections that the US would issue less bonds in the future would increase the attractiveness of US equities and corporate bonds, and help sustain the strength of the dollar, despite the weak current account situation. The surprise was that the dollar remained as strong as it did for so long.

Tom, you're disproving a claim that no one's made -- that the Clinton fiscal policy had no effect on the deficits or the economy. I'm saying that the effect they had was small compared to the effect of other economic factors. Please don't come back and repeat "but they say there was an effect!" Yes, there was. But you cannot give the Clinton economic team more than a little credit for the boom of the late nineties, any more than you can blame this recession on him or Bush, or than you will be able to credit Bush with whatever recovery we get. The president just isn't that economically powerful. Thank God.

Tom said, "That does *not* change the fact that in 1997, the improvement in the projected surplus forecast was 50% due to policy changes." But Tom quoted the article as saying "While the Clinton Administrations fiscal policy helped to bring the budget deficit under control and reduce the level of debt to GDP from 50 percent to 5 percent,..." which is not the same thing. "Helped to bring" and "was 50% due to" are NOT the same thing.

Sheesh. Tom complains about Megan misinterpreting the article (and putting words in her mouth), yet he does the same thing he accuses her of. Sloppy.

Personally, I always gave Clinton credit for (1) keeping Greenspan in as Chairman of the Fed, and (2) otherwise mostly keeping his hands off the economy.

Well, jane:

You wrote in the your original post:

'The idea that Bob Rubin got down in there with Greenspan and The Boss and decided to drive the 90's boom by trimming the deficit is ...flatly contradicted by what the administration officials said at the time.'

I have heard, first hand, from Laura Tyson (who was chair of the CEA at the time) an account that contradicts yours. As she described it, their primary economic concern in 1993-1994 was how to reduce the deficit and stimulate the economy at the same time.

Also, in Table 1 of the paper, we see that non-interest federal outlays declined as a share of GDP (from 19% of GDP in 1992, to 17.2% in 1996 to 15.9% of GDP in 2000). I have a hard time reconciling that with other parts of your original post.

Chris wrote:

"Tom said, "That does *not* change the fact that in 1997, the improvement in the projected surplus forecast was 50% due to policy changes." But Tom quoted the article as saying "While the Clinton Administrations fiscal policy helped to bring the budget deficit under control and reduce the level of debt to GDP from 50 percent to 5 percent,..."

The above is a typo, BTW, "5 percent" should have been 35 percent. Typing too fast.

"which is not the same thing. "Helped to bring" and "was 50% due to" are NOT the same thing.
Sheesh. Tom complains about Megan misinterpreting the article (and putting words in her mouth), yet he does the same thing he accuses her of. Sloppy."

No, sloppy is typos from typing too fast. And sloppy is not looking at Figure 4 of the actual article from the professors of Harvard, where you can see that, as of 1997, 50% of the change in the projected surplus/deficit was due to policy changes.

I read the background material before posting, dude. You do the same.

Tom repeatedly made the point...

"Also, from 1993-1997, 50% of the change in projected surplus projections was from policy"

... seemingly to argue against the notion that the unexpectedly strong economy caused the bulk of the surpluses, by pointing to a period *before* the economy became unexpectedly strong and before their were any surpluses.

Remember, the issue is the *surpluses*, not the pre-surplus years, as per the leading quote...

"During the Clinton administration, the projected Budget surplus improved by over one trillion dollars. However, most of this change came as a surprise to the administration..."

Referring to the actual surplus years, the paper states...

"During the years around the turn of the century, policy changes contributed about one-quarter of the total improvement..."

Nobody says fiscal policy doesn't matter at all. But to say the Clinton team's policy created the surplus is not true, the unexpected boom in the economy did. At least the Clinton team sure *didn't think* they were creating a surplus!

Regarding this, here's the contemporary budget projections (which I already posted in Arnold Kling's comments section) that show what the Clinton people *did* think they were accomplishing with the deficit, as of March 1996, well after their fiscal reforms had been enacted.

Year ... projected budget stance*
1996 ... $140 billion deficit
1997 ... $169 billion deficit
1998 ... $195 billion deficit
1999 ... $221 billion deficit
2000 ... $246 billion deficit
... rising to a $405 billion deficit in 2006.

So the actual surplus of $236 billion in 2000 arrived as a $482 billion surprise to them, compared to what they *expected* their actions to produce when they took them.

And if that wasn't a bit of happy unexpected good fortune for them, I don't know what would be.

[* "Baseline Total Deficit with Current-Policy Economic Assumptions, capping discretionary spending with inflation after 1998", CBO, 3/28/96]

The Republican congress gets all the credit for the prosperity in the 90”s.

Clinton gets all the blame for the recession that started in 1999 and the dot.com bust. The reason he gets the blame is that he is an asshole.

In fact the economy is too big for the government to have much effect. So any administration deserves no credit or blame for the state of the economy unless they do something really stupid like raising taxes or put in price controls.

Jake writes:

So any administration deserves no credit or blame for the state of the economy unless they do something really stupid like raising taxes or put in price controls.

While I can't think of a circumstance in which price controls are appropriate, I can't say the same about raising taxes. Do you really think it's never a good idea to raise taxes? Why not cut taxes to zero and run the government entirely off borrowed money, then?

Jim Glass wrote:

"Nobody says fiscal policy doesn't matter at all. But to say the Clinton team's policy created the surplus is not true, the unexpected boom in the economy did."

Or conversely, the unexpected strength in the economy in the late 1990s decreased the relative contribution of policy to the improvement in deficit.

Somehow the author of this blog, and you, consider this diminishes the merits of macroeconomic policy under Clinton/Rubin/Tyson.

The quotes I've posted above show that the authors of the paper don't discount the importance of policy decisions on the improvement in fiscal balance.

"Regarding this, here's the contemporary budget projections (which I already posted in Arnold Kling's comments section) that show what the Clinton people *did* think they were accomplishing with the deficit, as of March 1996, well after their fiscal reforms had been enacted."

Just a minor point: the projections you gave are CBO projections, not administration projections from, say, the CEA. They weren't prepared by "Clinton's people".

I may have missed it but I don't see in the referenced paper where policy changes only account for (maximum) 20% of the budget balance change.

If they are 50% of the change in 93-97 it seems 20% for the whole period is very low.

It seems to me disingeneous to accept that policy explains 50% of the change up to 1997 and then say that it had no impact afterwards. Even if the Clinton administration did not predict the strong growth of the second half of the 90s it's pretty clear that the fact that the budget was in a better position due to policy changes as the boom started is what allowed the surpluses to reach the levels they did.

If there had been no policy changes would we even have had a surplus? The budget balance would have improved but an actual surplus?

appropos of nothing...

... a joke for our Democratic friends (i'm a Republican - but this one always makes me laugh). (I'm pretty sure I got this from P.J. O'Rourke)...

* * *

A teenage boy is hitchhiking down a country road in the middle of nowhere in Iowa.

A farmer drives up in a pick-up truck. The kid ask for a ride. The farmer asks if the kid is a Republican or Democrat. "Democrat" says the kid. "Sorry," says the farmer - and he drives off.

Next a businessman in a fancy luxury car drives up. The kid asks for a ride. The businessman asks if the kid is a Republican or Democrat. "Democrat" says the kid. "Sorry," says the businessman - and he drives off.

Next a sexy blonde in a hot-red convertible drives up. The kid can't help but notice that the sexy blonde is wearing a super-short red dress that matches her car. The kid asks for a ride. The sexy blonde asks if the kid is a Republican or Democrat. The kid thinks, "I'm never going to get a ride this way...." so - "Republican" says the kid. "Hop right in," says the sexy blonde.

The kid rides for a few miles, and the wind really starts to pick up in the convertible. The kid can't help but notice that the wind is blowing the blonde's short red dress even farther up her gorgeous thighs. The kid tries not to look, but he keeps catching himself gawking at the blonde. Finally, the kid says, "Stop this car!"

"What's the matter?" asks the blonde. The kid musters up his courage and says, "I have to get out - I've only been a Republican for ten minutes and already I want to screw somebody!"

"Personally, I always gave Clinton credit for (1) keeping Greenspan in as Chairman of the Fed, and (2) otherwise mostly keeping his hands off the economy."

I'd agree with #1. #2 was mostly due to having to deal with a Republican Congress the last six years of his Administration. His health care plan--had it gone into effect--sure as hell would have hit the economy like a ton of bricks.

"Nobody says fiscal policy doesn't matter at all. But to say the Clinton team's policy created the surplus is not true, the unexpected boom in the economy did. At least the Clinton team sure *didn't think* they were creating a surplus!"

[snip 1996 budget estimates for next five years, all showing twelve digit deficit figures]

Yes. Remember how hard Clinton fought against the Republican plan to balance the budget in seven years? It's not surprising if you don't, since economic events rapidly made the plan to balance the budget moot, and allowed people to forget that Clinton was vociferously arguing that balancing the budget in less than ten years just couldn't be done. Hopefully, the historians will not let him get away with that little foible.

hi all,

"They didn't project surpluses until Clinton was safely past election time, and they were flabbergasted when they appeared, bigger than projected and way ahead of schedule. If congress or the President had known those record surpluses were coming, it's a sure bet that they would never have arrived."

if you think this is an accurate claim, you are going to have to explain why the dem candidate and the dems argued that the surplus should be kept during the last presidential election cycle. i mean, come on, remember that "locked box"? and the attempts to point out that the tax cuts would make that surplus disappear? remember gore being ridiculed for having the gall to disagree with candidate bush?

if you argue the surpluses would be dead on arrival, you have to explain why the dems didn't want to blow them. its bush that has gotten rid of these things. he fits your profile nicely--not with spending, but with tax cuts. essentially the same result.

no, i am sorry, with all due respect to jane the use of the paper to flog this horse of "irresponsible politicians" spending the money leaves me unconvinced.

cas:

"if you argue the surpluses would be dead on arrival, you have to explain why the dems didn't want to blow them. its bush that has gotten rid of these things. he fits your profile nicely--not with spending, but with tax cuts. essentially the same result'

That's a load of crap, and you know it! I've read your posts here before and I know you have an understanding of economics (even if I don't agree with your theories). To say that "the dems didn't want to blow [the surplus]" is disingenuous at best.

That whole "lock-box" farce was simply a method of preventing anyone but the Congress from spending the money. There never was any "lock-box" just like there never has been nor will there ever be any sort of "trust" for social security, etc. There are merely mandatory -- i.e. set by statute -- payments that need to be made on an ongoing basis into the future. The "lock-box" was only going to be full of I.O.U.'s as the Congress would have spent every last cent (and then some) of that surplus on all sorts of pet projects and entitlement programs. The difference between the "lock-box" and the tax cuts, therefore, is simply who gets to spend the money -- Congress (lock-box) or the people who earned the money (tax cuts).

"remember gore being ridiculed for having the gall to disagree with candidate bush?"

No. As a matter of fact, what I remember vividly is the major media falling all over themselves to coach Gore into a debate victory that he couldn't pull off by himself. At first it was that the bar was set to low for Bush because the media thought he was an idiot and Gore was a genius. Then it was because the bar was set too high for Gore. Then it was because Gore was too stiff. Then he was too casual. At *no time* was there any inclination from the media that GWB had the best answers or that Gore had come out on the wrong side of the issues. In fact, in one of the last debates, Gore was chided for merely *agreeing* with Bush on everything! Where do you come up with Gore being ridiculed at all?

As for the post topic, I won't pretend to understand the inticacies of the government budget. However, from my meager working-stiff experience, it sure looked to me like the economy got set to roaring back in the 80's when the government managed to get mostly out of the way of those of us trying to earn a living and save for the future. The 90's got to ride that wave, and Clinton did a fairly good job (mostly because of the Republican House) of not tinkering with the economy (although the '93 tax hike had some provisions that directly led to a lot of the Enronesque shenanigans of the late 90's). Business cycles come and go, and eas long as the POTUS keeps the government out of our hair, we the people will always keep the economic furnace stoked and running along quite well.

"its bush that has gotten rid of these things. he fits your profile nicely--not with spending, but with tax cuts. essentially the same result"

Bush has pushed through surprisingly large spending hikes as well as tax cuts.

"if you think this is an accurate claim, you are going to have to explain why the dem candidate and the dems argued that the surplus should be kept during the last presidential election cycle. "

As I recall, Mr. Gore had quite a few spending initiatives of his own, which would have whacked away at that surplus. Remember the prescription drug benefit?

"Business cycles come and go, and eas long as the POTUS keeps the government out of our hair, we the people will always keep the economic furnace stoked and running along quite well."

Indeed. In fact, I'd consider regulatory policy more important than adjusting tax rates a few percentage points. The rapid development of computer products was in large part because the industry was almost completely unregulated. New products didn't have to be blessed by any bureaucrat, no one needed permission to buy or sell products or services, and prices and quality improved at a rate unheard of in our lifetime.

"The rapid development of computer products was in large part because the industry was almost completely unregulated. New products didn't have to be blessed by any bureaucrat, no one needed permission to buy or sell products or services, and prices and quality improved at a rate unheard of in our lifetime."

How swiftly we forget the role of DARPA.

Standing your analysis on its head, we can look at the rapid growth of the pharma & biotech industry in the late 1990s. Can you think of any industry more heavily regulated than therapeutics?

Nobody seems to have considered the effect of the 1994 elections. Those elections gave control of Congress to the Republicans, who are historically less inclined to spend. Furthermore, it brought to Congress a large cohort of new Republican Representatives, committed to frugality. By the late 90s, most of these people were assimilated by the system, and became devotees of the pork barrel, but for a while there was serious resistance to spending increases. If the revenue boom had been anticipated, quite likely it would have all been spent: but there were some spending control measures in effect, like Gramm-Rudman. Enough Representatives were willing to fight for them, and so spending didn't immediately catch up to revenues, for a while.

"How swiftly we forget the role of DARPA."

No, I remember quite well the role of DARPA.

Thanks to longstanding monopoly protections on wired communications, the only two entities allowed to build a nationwide computer network were AT&T, who had no particular reason to thanks to the government-provided lack of competition, and the government itself, which eventually decided to go ahead and build one for military reasons.

I guess we should be thankful that the government finally decided to let the unwashed masses in on it, but we should not forget that it was government policy that prevented us from getting our own networks for a couple of decades before that.

"Standing your analysis on its head, we can look at the rapid growth of the pharma & biotech industry in the late 1990s. "

Was the effectiveness of available treatments being doubled every 2 years while simultaneously dropping in price?

'"How swiftly we forget the role of DARPA."

No, I remember quite well the role of DARPA.'

Evidently you have. There's a litany of technological innovations that were created by DARPA, including the GUI interface that we take for granted (made by Doug Engelbart's Augmented Human Interface group in the late 1960s.

'"Standing your analysis on its head, we can look at the rapid growth of the pharma & biotech industry in the late 1990s. "

Was the effectiveness of available treatments being doubled every 2 years while simultaneously dropping in price?'

Has that happened in, say, automobile manufacturing?

You point is invalid because the rate of technological innovation in a particular industry is more strongly related to the maturity of the underlying science & engineering rather than the level of regulation.

Comments are Closed.