Fund Your Utopia Without Me.™

12 August 2012

Lies, Damned Lies, & Urban Myths: The Economics of the1990s


According to the original Treasury Department estimates, the Clinton tax hike was to raise federal revenues by 0.36% of GDP in its first year and by 0.83% of GDP in its fourth year, when all provisions were in effect and timing differences associated with near-term taxpayer behaviours had normalised. Tax receipts were relatively static in 1993 and 1994, so I wouldn’t read that as a positive created by the 1993 tax rises. 1, 2.

Since World War II, tax receipts have averaged around 18.1 percent of GDP. Receipts have fallen due to the recession, but as the economy recovers, they will rise above the historical average level by the end of the decade, even if all the 2001 and 2003 tax cuts are made permanent.


Sources: Office of Management and Budget and Congressional Budget Office (Alternative Fiscal Scenario).

In the four years following the Clinton tax hike (from 1993 through 1996):

* The economy grew at an average annual rate of 3.2% in inflation-adjusted terms; 6

* Average real hourly wages rose a total of five cents per hour (BLS, average hourly earnings, non-supervisory employees);  

*  The net effect of trade in the 1990s was to slow the U.S. economy, with the trade deficit almost quadrupling to $408.7 billion; and

* Total market capitalisation of the S&P 500 rose 78% in inflation-adjusted terms.9


Taxes per Household Have Risen Dramatically


 Sources: U.S. Census Bureau and Office of Management and Budget.

Economic growth was solid, but hardly spectacular in the years immediately following the 1993 tax increase. This is not really that surprising. The rule is “the deeper the recession, the stronger the growth in the post-recessionary period.“ Compared with the economic performance after the 1981-1982 recession, it was very mild, indeed. Job growth was strong, as expected. The stock market performed well, but real wage growth was nearly non-existent. The economy was still growing, but GDP growth had started to slow at the end of 1994 and early 1995 and by the end of the year, GDP had nearly returned to its 1993 level. Additionally, nervous about inflation, the Federal Reserve raised interest rates to “soften the landing.”3  In 1995, the annual report of the United States Trade Representative was already claiming that “[T]he United States market has hard limits on its growth; we have a mature economy and economic growth is beginning to slow.” 9

* Industrial production—output of factories, mines, and utilities—leveled off. 3

* October industrial production index barely exceeded its January 1995 value. 3

* Payroll employment in manufacturing decreased by an average of 16,500 jobs per month. (BLS, total non-farm payroll, payroll survey)

* Business inventories rose relative to sales.

* Production slowed due to excess inventory and soft sales figures. 1

* Real GDP was down to 2.0% down from 4.1% the previous year. 5.

* The net effect of trade in the 1990s was to slow the U.S. economy, with the trade deficit almost quadrupling to $408.7 billion. 4

The real economic boom occurred in the latter half of the decade, after the 1997 tax cut. In addition to the data below, one example of this boom is explosion in the amount of venture capital invested.9  In 1995, the first year of data, the total amount of venture capital invested was $8 billion. By 1998, the first full year in which the lower capital gains rates were in effect, venture capital activity reached almost 28 billion, more than a three-fold increase over 1995 levels, and by 1999, it had doubled yet again.

The 1997 Tax Cut & Its Affect On Taxable CG Income (billion dollars):

1993: 36…..(emergence from recession)
1994: 36
1995: 44
1996: 66
1997: 79
1998: 89
1999: 112
2000: 131….(Dot-com bust, 10 March 2000 and recession begins followed by 9/11.

*  The economy averaged 4.2% real growth per year from 1997 to 2000–a full% point higher than during the expansion following the 1993 tax rise. 5

* Employment increased by 11.5 million jobs, which is roughly comparable to the job growth in the preceding four-year period. (BLS, total non-farm payroll, payroll survey)

* Real wages, however, grew at 6.5%, which is much stronger than the 0.8% growth of the preceding period. (BLS, average hourly earnings, non-supervisory employees)

* Total market capitalisation of the S&P 500 rose an astounding 95%.

* In 1998, the CBO attributed only 1 percentage point of that extra tax revenue to the 1993 budget-tax rise deal. The rest, it said, came from capital gains.10

* Between 1994 and 1999, realised capital gains nearly quadrupled, the CBO concluded, with taxes on those gains accounting for about 30% of the increased growth of individual income tax liabilities relative to the growth of GDP. 11

I do not believe in unified budgeting. It is a gimmick where the government borrows from trust funds to cover its deficit spending, but let’s go with “Clinton had a surplus” and see what the Washington Post has to say:

“…The Clinton plan was never intended to achieve a balanced budget. After the bill’s passage, the Congressional Budget Office estimated that the deficit would decline modestly — from 290 billion in 1992 to 200 billion in 1998. In the phrase of the era, there were still “deficits as far as the eye could see.”

Indeed, the Clinton budget plan was actually slightly smaller, on an inflation-adjusted basis, than the deficit-reduction package signed into law in 1990 by President George H.W. Bush (770 billion versus 830 billion). Many Republicans also opposed that deal — which Boxer supported — because it included higher taxes.

Fast forward to 1995. The Democrats lost control of the House and the Senate, largely because of bruising budget battle. Clinton’s fiscal year 1996 budget again proposes 200 billion deficits every year for the next five years. So, again, the target in 1998 (when “surpluses” later emerged) was a deficit of 196 billion.

But Republicans immediately set the goal of achieving a balanced budget within seven years. After resisting for a few months, Clinton shocked many fellow Democrats by announcing that he, too, would embrace the idea of a balanced budget.

As The Washington Post editorial page put it at the time, Republicans had forced Clinton’s hand: “Mr. Clinton’s new position on the budget is much better than the old one. He should have taken it six months ago. The Republicans have driven him to say that he too wants, if not to balance the budget, at least to get the deficit into the neutral zone.”

From 1992 to 1997, CBO estimated, revenue increased at an annual average of 7.7 percent in nominal terms, or about 2.4 percentage points faster than the growth of the gross domestic product, the broadest measure of the economy. CBO Deputy Director James L. Blum in 1998 ATTRIBUTED ONLY 1% POINT OF EXTRA REVENUE BETWEEN 1993 AND 1998 TO CLINTON’S 1993 TAX INCREASES. The rest, he said, came from capital gains.

Between 1994 and 1999, realized capital gains nearly quadrupled, the CBO concluded, with taxes on those gains accounting for about 30% of the increased growth of individual income tax liabilities relative to the growth of GDP. 

There were other factors as well, such as lower than expected health costs that reduced an expected drain on the budget. Clinton’s predecessor also had kicked in motion a huge decline in defense spending (which Clinton accelerated) and also had overseen a painful restructuring of the banking industry. Even a potential shock, such as the Asian financial crisis in 1997, brought the silver lining of lower oil prices that bolstered the U.S. economy.

Credit Clinton with this, however: When the prospect of budget surpluses (due to Social Security monies) emerged in 1998, he adroitly blocked GOP demands for a tax cut by forcing a bidding war on how much to reserve for Social Security — a political maneuver that likely prevented the (Social Security) surpluses from disappearing as quickly as they appeared. We all know what happened after Clinton left office.

For claiming that Bill Clinton was for a balanced budget from the beginning, the Clinton tax hikes were responsible for the majority of increased revenues,and led to the booming economy, etc., Sen Boxer got the dreaded 3 Pinocchios from the WP.


The claim is generally made that Clinton had a surplus of $69 billion in FY1998, $123 billion in FY1999 and $230 billion in FY2000.  Also, Clinton claimed that the national debt had been reduced by $360 billion in his last three years, presumably FY1998, FY1999, and FY2000--though, interestingly, $360 billionis not the sum of the alleged surpluses of the three years in question (69B + 123B + 230B = 422B, not 360B).

While not defending the increase of the federal debt under Bush, it's curious to see Clinton's record promoted as having generated a surplus. It never happened. There was never a surplus and the facts support that position. In fact, far from a $360 billion reduction in the national debt in FY1998-FY2000, there was an increase of $281 billion.

Verifying this is as simple as accessing the US Treasury website where the national debt is updated daily and a history of the debt since January 1993 can be obtained. Considering the government's fiscal year ends on the last day of September each year, and considering Clinton's budget proposal in 1993 took effect in October 1993 and concluded September 1994 (FY1994), here's the national debt at the end of each year of Clinton Budgets:

As can clearly be seen, in no year did the national debt go down, nor did Clinton leave Bush with a surplus that Shrub subsequently turned into a deficit. Yes, the deficit was almost eliminated in FY2000 (ending in September 2000 with a deficit of "only" $17.9 billion --- Oh, what we would not do to have a deficit like that!!!), but it never reached zero--let alone a positive surplus number. And Clinton's last budget proposal for FY2001, which ended in September 2001, generated a $133.29 billion deficit. The growing deficits started in the year of the last Clinton budget, not in the first year of the Bush administration.

The surplus deception is clearly discernible in the statistics of national debt. While the spenders are boasting about surpluses, the national debt is rising year after year. In 1998, the first year of the legerdemain surplus, it rose from $5.413 trillion to $5.526 trillion, due to a deficit of $112.9 billion.

And, don't take my word for it:

"So the table itself, according to the figures issued yesterday, showed the Federal Government ran a surplus. Absolutely false. This reporter ought to do his work. This crowd never has asked for or kept up with or checked the facts. Eric Planin--all he has to do is not spread rumors or get into the political message. Both Democrats and Republicans are all running this year and next and saying surplus, surplus. Look what we have done. It is false. The actual figures show that from the beginning of the fiscal year until now we had to borrow $127,800,000,000.”

"Of the $142 billion surplus projected by the end of 2000, $137 billion will come from excess Social Security taxes."

"The surplus deception is clearly discernible in the statistics of national debt. While the spenders are boasting about surpluses, the national debt is rising year after year. In 1998, the first year of the legerdemain surplus, it rose from $5.413 trillion to $5.526 trillion, due to a deficit of $112.9 billion.   The federal government spends Social Security money and other trust funds which constitute obligations to present and future recipients. It consumes them and thereby incurs obligations as binding as those to the owners of savings bonds. Yet, the Treasury treats them as revenue and hails them for generating surpluses. If a private banker were to treat trust fund deposits as income and profit, he would face criminal charges."

 - Hans F. Sennholz, The Surplus Hoax, Ludwig von Mises Institute, 30 November 2000

"In the late 1990s, the government was running what it -- and a largely unquestioning Washington press corps -- called budget "surpluses." But the national debt still increased in every single one of those years because the government was borrowing money to create the "surpluses." 

- John Steele Gordon, Why Government Cannot Run A Business, Wall Street Journal, 21 May 2009

"An overall "downsizing" of government and a virtual end to the arms race has contributed to the surplus, but the vast majority is coming from excess Social Security taxes being paid by the workforce in an attempt to keep Social Security benefit checks coming once the "baby-boomers" start to retire."


"When these unified budget numbers are separated into Social Security and non-Social Security components, however, it becomes evident that all of the projected surplus throughout this period is attributable to Social Security. THE REMAINDER OF THE BUDGET WILL REMAIN IN DEFICIT THROUGHOUT THE NEXT DECADE."

 - Kilolo Kijakazi and Wendell Primus, Would Using the Budget Surplus for Tax Cuts or Entitlement Expansions Affect Long-Term Social Security Solvency?, Center on Budget and Policy Priorities, 13 March 1998

"Despite a revenue shortfall, full benefits are expected to be paid out between 2017 and 2041. The system will draw on its trust fund, a collection of special-issue bonds from the government, which borrowed prodigiously from the program's surplus over the years. But since the country is already running a deficit, the government will have to borrow more money to pay back its debt to Social Security. That's a little like giving with one hand and taking away with the other."

 - Jeanne Sahadi, The Only Way To Fix Social Security, CNN Money, 20 August 2008

You can check all of this out at, too.

Moreover, take a look at the MTS (MTS = Monthly TREASURY Statement of the Federal Receipts and Outlays of the United States Government) from September 2000.  You will see that during the time of the so-called "surpluses," $246.5 billion weas taken out of the "Trust Funds" of Social Security, Civil Service Retirement Fund, Federal Supplementary Medical Insurance Trust Fund, Federal Hospital Insurance Trust Fund, Unemployment Trust Fund, Military Retirement Fund, Transportation Trust Funds, Employee Life Insurance & Retirement Funds, and other alleged "Trust Funds".
See:  Table 6 Schedule D of the MTS for September 2000,

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