That’s the claim made today by influential commentator Joe Weisenthal of Business Insider. Weisenthal’s claim is based on the basic macroeconomic identity that income equals spending. As advocates of the Modern Monetary Theory (MMT) school of thought (such as Stephanie Kelton of University of Missouri Kansas City) have emphasized, this simple identity has profound implications. It means that if one sector of the economy is saving (spending less than it’s earning) then the other sectors of the economy must be accumulating debt or running down savings (spending more than they are earning).
For a closed economy, this identity means that government deficits must imply private sector saving (with the private sector buying government bonds) while governments can only save (run budget surpluses) if the private sector runs up debts or runs down its savings.
In an open economy, government deficits don’t have to imply private saving as it may be the rest of the world that saves by accumulating the government’s debt; in this case, it is the rest of the world that is spending less than it’s earning in income. Conversely, in an open economy, a budget surplus doesn’t have to mean the private sector is reducing its stock of assets or running up debt but that the rest of the world is reducing its stock of assets that it is owed by the surplus-running country.
Weisenthal’s argument is that Bill Clinton brought about the financial crisis by running surpluses. Based on the income-spending identity, he concludes it was Clinton’s surpluses that lead to the accumulation of private debts that subsequently triggered the financial crisis. I think the “sectoral balances” viewpoint is extremely important for understanding macroeconomics and MMT contributors such as Kelton are doing a great job of promoting its implications. But I think Weisenthal’s interpretation of the data is off base.
For starters, here’s the chart showing the US federal budget deficit as a share of GDP. Clinton’s surpluses began to erode during George W Bush’s first year in office and the US was back to running large deficits again in 2003.
And why does 2003 matter? Well, that’s when US house prices, which had already been increasing at a decent clip, went into overdrive. So it wasn’t budget surpluses that drove the unsustainable asset price bubble that brought about the crash.
And contrary to Weisenthal’s story in which the US private sector was “forced” to live beyond its means by a government insistent on running budget surplus, the years prior to the global financial crisis saw both the public and private sectors in the US living beyond their means, with this accumulation of debt financed by current account deficits run with the rest of the world. These deficits, which had been large under Clinton, doubled under George W. Bush.
Weisenthal mentions the role of Fannie and Freddie in stoking up the mortgage crisis. There is little doubt that the federal housing agencies played a role in attempting to extend home ownership rates higher than was perhaps sensible. However, a look at the data shows that the push towards high rates of home ownership that began under Clinton was continued under the Bush administration right up to the eve of the crisis. So you could argue that both administrations deserve equal blame for these developments.
Weisenthal is right to be skeptical of the simplistic view that it is always good for the government to run surpluses or even balanced budgets; the right budget balance for an economy will change over time depending on underlying conditions in the private sector. But using sectoral balances to reach back in time to blame Bill Clinton for the financial crisis is an argument that doesn’t fit the facts.