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Presidents and the Economy: Bill Clinton and the Era of Budget Surplus

In spite of his impeachment, his marital infidelity, and his vehement denial that he did not have sexual relations with a young intern named Monica Lewinsky when in fact this assertion was clearly false, many people tend to cut Bill Clinton a lot of slack. The reason is that despite his moral shortcomings, he is the only President to have presided over an economy with budget surpluses in recent years. President Clinton oversaw a period of considerable economic growth and expansion during his two terms in office. On his watch, real GDP per capita increased from about $38,000 in 1994 to about $45,000 in 2001. The U.S. national debt as a percent of GDP also declined from about 66% to about 56% during Clinton's time in office, and there were budget surpluses in the last four years of his presidency. While many Democratic politicians are portrayed as "tax and spend liberals", Clinton’s economic approach did not follow this formula and tried to make the federal government smaller, less wasteful, and more in tune with a newly globalized era.



Clinton assumed office following the tail end of a recession. His stated fiscal goals were fourfold:
1. Establish fiscal discipline and eliminate the budget deficit
2. Maintain low interest rates and encourage private-sector investment
3. Eliminate protectionist tariffs
4. Invest in human capital through education and research

During the 1992 presidential campaign Clinton ran on the economic platform of balancing the budget, lowering inflation, lowering unemployment, and continuing the traditionally conservative policies of free trade. During Clinton’s presidency the economic policies he put into place for the U.S. were termed Clintonomics.

Clinton kept economist Alan Greenspan as the Chair of the Federal Reserve’s board of governors throughout his presidency and he generally appointed economic advisers who supported a “tight money" policy. During his term the Consumer Price Index (CPI) stabilized and the rate of inflation never rose above 5 percent in any year during the Clinton presidency. This led to a huge growth in the Dow Jones Industrial Average. It also contributed to an increase in the trade deficit from -$100 billion to nearly -$400 billion in 2000.

Under Clinton, the Minimum wage Increase Act of August 20, 1996 raised the minimum wage and let states set it even higher if they wished. In 1999, Clinton signed the Financial Services Modernization Act, which allowed banks, insurance companies and investment houses to merge, repealing the Glass-Steagall Act which had been in place since 1932. Some economists point to this as a partial cause of the financial meltdown of 2008.

Clinton signed the Omnibus Budget Reconciliation Act of 1993 into law. This act created a 36 percent to 39.6 income tax for high-income individuals in the top 1.2% of wage earners. Businesses were given an income tax rate of 35%. The cap was repealed on Medicare. Taxes were raised 4.3 cents per gallon on transportation fuels and the taxable portion of Social Security benefits were increased. The Taxpayer Relief Act (1997) reduced some federal taxes. Due to certain phase-in rules, the tax rate for capital gains was lowered from 28% to 20%. This Act exempted profits on the sale of a house of up to $500,000 from taxation for individuals who are married, and $250,000 for single individuals. Educational savings and retirement funds were given tax relief. The Personal Responsibility and Work Opportunity Act of 1996 brought about a change in government assistance to the poor.



During Clinton’s presidency, the US government income and expenses transitioned from a deficit position into a surplus. This is somewhat misleading however, because the surplus was only recorded against public debt, and did not include intragovernmental loans. This meant that the administration was able to record loans made by the social security trust fund to the government as revenue on budget reports, which accounted for the most of the surplus money. Including the money owed to the social security trust fund, the lowest deficit was about $17.9 billion, in the year 1999-2000, the lowest level since 1973-1974. The total national debt actually rose every year of the Clinton Administration from $4.3 trillion to $5.6 trillion. The balanced budgets and surplus increased investor confidence in the economy, leading to an increased amount of investment, especially in the stock market.

Many of his critics argue that Clinton cost many Americans jobs because he supported free trade. Conversely, his supporters point to the low unemployment rates during his term to dispute this assertion. Clinton took the deficit of 4.7% of GDP in 1992 and left office with a surplus of 2.4% of GDP in 2000. Federal spending fell to 18.4 percent of GDP in 2000 from 22.2 percent in 1992. Although taxes were raised taxes in 1993, they were cut in 1997. When he left office, the rate of inflation was 2.3%. Clinton achieved a thirty year low in April 2000 with an unemployment rate of 3.9%.

Clinton has been heavily criticized for supporting the North American Free Trade Agreement (NAFTA). His critics argue that this agreement has made it more affordable for manufacturing companies to outsource jobs to foreign countries and then import their product back to the United States. This policy caused a significant decrease in the amount of unskilled jobs in the United States.
Clinton is also criticized for not doing enough to reverse the trends toward the widening income gap that began in the late 1970s and 1980s. Clinton's administration is also criticized by some for providing no benefits to unionized labor and for failing to strengthen collective bargaining rights.



Whether or not the criticisms of Clinton are fair or purely partisan, he presided over a time of economic prosperity and budget surpluses that are the envy of modern times. The extent to which Clinton deserves credit for these economic successes will continue to be the subject of political debate.