Against Budget Surpluses
By Arnold Kling
Wayne Angell argues that the Clinton Administration paid down the Federal debt too quickly.
The recent peak in federal debt as a percentage of GDP averaging 49% from 1993 to 1996, compared with the all-time peak in 1946 of 109%, was rapidly reduced by an annual pay-down of the debt of 1.4%, 1.9% and 8% successively in 1998, 1999, and 2000. Unfortunately, the rapid pay-down of the debt slowed the growth of GDP from 6.2% in 1998 to 2.9% in 2001…
By paying the federal debt down by 12 percentage points from 46% of GDP in 1997 to 34% in 2001 it was necessary that monetary policy accommodate an increase in household debt by 19 percentage points from 67% in 1997 to 86% in 2003…Ironically the attempt to “pay down the federal debt,” seems to have coincided with a 37 percentage point increase in non-federal debt and a 38 percentage point increase in total non-financial debt to 204% of GDP.
In Keynesian terms, what Angell is arguing is that the government was subject to a paradox of thrift. Its attempt to save more caused a recession, and total national savings did not increase.
I do not fully share Angell’s view, because I think that for the most part the recession was due to an autonomous drop in the stock market. However, I have always wondered how the strategy of running up large Budget surpluses in anticipation of Baby Boomer retirements was going to be carried out without throwing the economy into recession. It is a question that those who advocate such a strategy have yet to answer.
For Discussion. How would you accumulate large Budget surpluses without risking a shortfall in aggregate demand?