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    The Clinton Surplus Myth

    It is obvious that during elections in which the economy is the most important issue to voters, the candidate deemed to be “strongest” on the economy will get elected.

    As it happens, one of the arguments I most often hear in support of the Obama presidency is citing the budget surplus under the previous Democratic president, Bill Clinton. This is supposed to give evidence to the superiority of the Democrat’s “economic plan” over Bush’s disastrous “free market” policies. The only problem is the alleged budget surplus is a myth, a fabrication propagated by those who don’t understand how the federal budget is accounted or how business cycles are created.

    The fact of the matter is, by looking at publicly available data from the Treasury department, the federal budget under the Clinton years operated at a deficit of $100-200 billion for most years, reaching a low point of $18 billion during 2000, but leaving a deficit budget of $130 billion during Clinton’s departing year, in 2001.

    By definition, there could not have been a budget surplus; deficit spending defies the idea of the existence of a budget surplus or balanced budget. However, the lie isn’t so obvious that Clinton wasn’t able to use political maneuvering and clever accounting to sell the surplus idea; it’s probable that Clinton was even fooled himself into believing that he was able to produce a surplus without cutting spending or significantly raising taxes. So where did the surplus myth come from?

    While government spending was in a deficit, the U.S. public debt, better known as the national debt, was being paid off. The national debt accounts for money that the federal government owes to states, corporations, individuals, and foreign governments but not what is owed to intragovernment obligations, such as the Social Security trust fund.

    So while the public debt was being paid off, the debt from intragovernment holdings skyrocketed while general federal spending was relatively unchanged. Clinton pointed to the national debt as being paid off, but neglected to mention that the source of this money was debt owed to Social Security.

    The dot-com bubble provided a temporary economic stimulus during the Clinton era, which allowed the Social Security Administration (SSA) to increase revenue through Social Security taxes, leaving Social Security with a surplus.

    The Social Security Administration is legally required to purchase government securities with surplus funds, which results from having more funds than required to pay out Social Security checks. This results in a transfer of funds from Social Security, intragovernment holdings, to the Treasury Deparment, which Clinton used to pay down the national debt.

    You may wonder what the problem is. If there is a surplus of funds, does it really matter where it comes from?

    There is a difference between debt and surplus, no matter where the funds are coming from. The government doesn’t have unique sources of production, and must rely on external sources from which to extract capital. Therefore, a true surplus can only arise by reducing spending.

    Even by raising taxes, this only represents debt owed to the public. Clinton relied on the dot-com bubble by funneling funds through the SSA, which allowed him to mimic a surplus by obscuring the source of his funds. This is a clever accounting game, but it is not a surplus.

    So when the dot-com bubble burst, and Social Security was left in debt, the federal government couldn’t give the SSA its surplus back. The money had been put towards the public debt already. By that time, Clinton was already out of office, so the effects of the dot-com crash could be blamed on the Republican George Bush anyway.

    The bubble itself, which was caused by overspeculation in Internet-based start-up companies, was, in itself, funded by low interest rates set by the Federal Reserve, giving investors a surplus of capital which to invest in the overvalued Internet companies. Government policy contributed to the unsustainable dot-com bubble which the government took advantage of to temporarily reshuffle its debt to give the appearance of a budget surplus to win political favor.

    Admittedly, I blame ignorance rather than malevolence on the bad policies of the Clinton Administration. I doubt that Clinton, who is unstudied in Austrian economic theory, realized how his policies contributed to the business cycle, and therefore probably thought his debt reshuffling was innocuous. If he had realized that the dot-com bubble was going to burst, however, and that it would leave the economy worse off and Social Security without its much-needed surplus, he would have found a different way to pay off the national debt through lowering spending. If more people were aware of the above facts, I very much doubt that Obama would want his economic policies associated with the likes of Clinton. Unlike Clinton, Obama is coming into office at the beginning of a recession, without a plan to decrease government spending and will have no concievable way of decreasing the national debt.

    If Obama wants to cause real economic prosperity that Americans can rely on, he will focus on decreasing the size and scope of government, cease federal policies that generate unsustanable economic bubbles and let people keep more of their own money. Otherwise, like Clinton, he will leave office with delusions of granduer and leaving more problems that will be blamed on the next President. Surely, Obama has a better vision for the future of this country.

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