Quora: Why Did Clinton's Budget Work, But Not Obama's?

Bill Clinton
Former President Bill Clinton. Alex Wong/Getty

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Answer from William Murphy, Professor of American history:

How did Bill Clinton manage to balance the budget after George H.W. Bush, but Obama couldn't after George W. Bush?

The political and economic circumstances of the Clinton and Obama presidencies were vastly different.

For one thing, there was not actually a recession during Clinton's presidency—there was a recession in 1991 and 1992 which contributed greatly to Clinton's election, but the economy was in recovery by 1993 when Clinton actually took office.

For another, the early 1990s saw two rounds of significant tax increases—one in 1990 under President George H.W. Bush, the violation of his infamous "Read my lips, no new taxes" pledge, and the other in 1993 under Clinton, which may have helped cost Democrats control of both Houses of Congress in 1994. So the tax baseline was much higher for most of Clinton's presidency as a result of these two tax hikes.

But even then, no one was projecting a balanced budget, and certainly not a surplus. But by 1999, late in Clinton's presidency, that's exactly what we got. How?

Well, the main driving factor was the tech boom of the 1990s.

See, it's a little-understood fact that government revenue is hugely impacted by economic growth. During a recession, a budget that was balanced in good times can suddenly begin running a huge deficit without any changes in taxes or spending, because tax receipts are lower when fewer people are working, corporate profits are lower and wages and salaries falling or remaining stagnant rather than rising. At the same time, however, an economic boom can significantly improve your budgetary outlook, again without changing tax rates or spending levels, because all of a sudden a lot more people are employed and/or making more money than they were before, and are therefore paying more in taxes.

That's what happened under Clinton. The early 1990s saw an increase in baseline tax rates, and the late 1990s saw a huge, unexpected surge in revenue under those higher tax rates as a result of higher-than-expected rates of economic growth.

Bill Clinton had not actually been trying to balance the budget. Nobody had. And nobody expected it to happen. When it did happen, both the Republicans who took control of Congress after the 1994 elections, and Clinton himself who was president, tried to claim credit for doing it. But none of them had been trying to make it happen — they had tried to reduce the deficit, but did not expect to actually balance the budget.

It was a happy accident.

So why couldn't Obama pull off the same feat?

Well, for one thing, the Great Recession of 2007–2009 was much deeper and more severe than the recession of the early 1990s. So the economy had to recover from a much deeper hole, and the Obama administration supported a stimulus package that added to an already-record-high deficit inherited from the Bush administration. The deep recession cut into government tax revenues in a reverse of the effect in the late 1990s that had led to a balancing of the budget. And then there was the lingering effect of the Bush Tax Cuts.

In 2001 George W. Bush pushed through a massive series of tax cuts, arguing that the surplus he inherited from Clinton made it possible to undo the tax increases of the early 1990s and cut taxes even further. These tax cuts, combined with the end of the tech boom and a recession than began in late 2001, drove the budget from a projected $200 billion a year surplus to a $400 billion a year deficit in a little over a year, and the deficit rose steadily throughout Bush's presidency, peaking at a projected rate of $1.2 trillion when Obama took office with the country in the midst of a major financial and economic crisis.

This graph, from the Center on Budget and Policy Priorities in 2004, shows what the deficit was projected to be from 2001 to 2014 without the Bush tax cuts (blue line) and what it was with the Bush tax cuts (red line). And this projection did not anticipate a major financial crisis in 2008.

There would have been deficits either way because the boom that balanced the budget in the late 1990s had come to an end. But the Bush tax cuts created much, much deeper deficits, and everyone knew it was going to happen. When Bush's Treasury Secretary, Paul O'Neil, tried to raise alarms that the tax cuts would explode the deficit, Vice President Dick Cheney said, "You know, Paul, Reagan proved deficits don't matter".

Six Years After Cheney Said 'Deficits Don't Matter,' The National Debt Hits A 50-Year High

So, that was the baseline that Obama inherited. While Clinton's predecessor had raised taxes, and Clinton was able to do so as well early in his presidency, Obama's predecessor had pushed through deep tax cuts that produced deep deficits and then there was a major financial crisis and the deepest recession since the Great Depression which further depressed federal revenue. Obama supported temporary spending increases to stimulate the economy — his stimulus package only lasted for two years — but he was unable to completely undo the Bush tax cuts. Those cuts had included a "sunset provision" that required them to expire in ten years so Republicans could pass them through the budget reconciliation process in 2001, avoiding a Democratic filibuster in the Senate. Reconciliation can only be used for bills that do not increase the deficit for a period of more than ten years, so by having the cuts expire in ten years they could claim it would not increase the deficit for longer than that, and thus fit into the reconciliation process; however, at the time it was widely assumed that the cuts would be made permanent in 2011 because it would be too unpopular to raise taxes (this is why the chart I posted above, made in 2004, assumed the cuts would still be in effect in 2014). Obama was able to use the expiration in 2011 to force the Republican-led Congress to accept the expiration of the Bush cuts, but only for people making more than $450,000 a year; the rest of the Bush cuts were actually made permanent as part of the budget deal of 2011.

So Clinton had two consecutive tax hikes followed by an almost unprecedented (and wholly unanticipated) economic boom that led to an accidentally balanced budget.

Obama had a predecessor who handed him massive deficits as a result of a huge unfunded tax cut and took office in the midst of a major economic crisis, and after his first two years in office was facing a hostile Congress that was opposed to any further tax increases. Spending levels were cut — and cut dramatically — during the Obama administration; the Budget Control Act of 2011 imposed the so-called "sequester" that automatically slashed both domestic and defense spending every year since 2011 (and which is still in effect).

So both the political and economic conditions which led to Clinton leaving office with budget surpluses did not exist for Obama. Clinton did not try to balance the budget but did so anyway for the reasons I've explained above; Obama would not have been able to do it even if he had wanted to, because the political will was not there for deeper budget cuts or tax increases, and because the relative weakness of the economy was holding down tax receipts.

*Please note: there is a difference, which many people do not understand, between the deficit, which is the annual difference between how much the government takes in and how much it spends, and the national debt, which is the cumulative effect of the deficit over time. The national debt did reach record highs under Obama (and had previously reached record highs under Bush) but the annual deficit steadily decreased from 2011 to 2015 before rising somewhat again in 2016. We have cut 'our deficits by almost three-quarters,' Obama says in State of the Union.

That link, by the way, is to a fact-check of the claim that Obama reduced the deficit, not to the claim itself.

How did Bill Clinton manage to balance the budget after George H.W. Bush, but Obama couldn't after George W. Bush? originally appeared on Quora - the place to gain and share knowledge, empowering people to learn from others and better understand the world. You can follow Quora on Twitter, Facebook, and Google+. More questions:

Quora: Why Did Clinton's Budget Work, But Not Obama's? | Opinion