Over and over the left crows about the "Clinton surpluses", contrasting them with the Bush deficits in order to argue that expansive government can be financially responsible. Similarly, they point to the deficits during the Reagan years as a sign of Republican irresponsibility. However, do these numbers really mean what they seem to? And is history really what they suggest it is?

Well, let us start by pointing out what should be obvious, though thanks to economic illiteracy is often ignored. Since 1973 we have been living in a state of constant inflationary crisis. Inflationary "boom-bust" cycles have been a constant reality since the Federal Reserve was established, and were frequent even earlier under the federal banking schemes instituted around the time of the Civil War. However, it wasn't until 1973 and the end of any relationship between the dollar and gold that the federal government gained the ability to inflate without any check.

Second, we have not been able to control spending since the 1930's. With the birth of Keynesian schemes, deficits became a constant reality. Granted, even prior to that we had budget problems, but the permanent deficit really is a creation of the New Deal, made much worse by the Great Society. Prior to the 1930's there existed every possibility of reigning in federal spending. Since the introduction of Keynesian theory to the US, there is simply no prospect of ever balancing the budget.

However, though we have been in a perpetual state of either strong inflation or deflationary collapse since 1973, there have been some periods of greater sanity. And one such period was the Reagan administration. Now, it is true spending was absurdly high, though not for the reasons the left suggests. While the left pretends that Reagan broke the budget through military spending, in reality 80%+ was spent on "social spending", meaning the budget could easily have been balanced, even without military cuts, had we eliminated the costly welfare state programs.

On the other hand, what is noteworthy about the Reagan era is the decline in monetary inflation. It is not obvious from CPI-based indices, as the Reagan policy caused distortions in the numbers making up the CPI*, but during the 8 years Reagan was in office inflation was largely controlled. Obviously, it was not stopped, as the Federal Reserve's very design makes stopping inflation almost impossible, but the Reagan practice of borrowing from private lenders rather than monetizing debt kept the growth of the money supply in check.

What is interesting is, even with the massive drag on growth that Reagan's borrowing created, the Reagan era initiated a period of real strong growth. Unlike the subsequent (and preceding) administrations, there was no post-Reagan slump, no crash following his administration. He inherited an economy in shambles, double digit interest rates, uncontrollable inflation, slow or negative growth, and he left an economy strong and stable. Granted the cure was uncomfortable, the deflationary slump of 1981-1982 was painful, but the result was a stronger economy and a much more stable currency.

Not so the presidents who followed him. Though he allowed a massive tax increase, G.H.W. Bush was still unable to balance the budget and, unlike Reagan, had little problem turning to the Fed to finance congressional spending, meaning that we returned once more to the inflationary policies which had been so disastrous during the Nixon and Carter administrations. Then again, thanks to the robust economy he inherited, as well as that tax increase, he managed to inflate relatively little, and so the economy suffered only small harm.

Not so the next president. Clinton was no stranger to inflation and was quite happy to cause the money supply to expand wildly. During his administration was saw our first post-Reagan boom-bust cycle with the "Clinton economy" diverting massive amounts of money into the stock market, especially tech stocks, creating the dot-com bubble and subsequent bust. Worse still, Clinton resolved that problem by inflating even farther, setting the stage for the later housing bubble, whose explosion we are now experiencing. (Though, to be fair, G.W. Bush's inflation following the 2001 slump played quite a role as well. Neither party is free of blame in using inflation to obscure economic problems.)

And that is why I think it is absurd to praise the "Clinton surpluses". Yes, Clinton did show a surplus on the books, but it was largely illusory. As during any inflation, the early periods show huge gains, when measured in monetary terms, as inflation distorts accounting practices, causing companies to unknowingly pay out capital as dividends, report inflated earnings, and generally show gains which are purely fictitious. And as the government's revenues are tied to reported profits, the government did quite well by siphoning off a share of these illusory gains. In addition, being able to repay debts in devalued, post-inflationary dollars, as well as refinancing in an "easy money" environment at much lower interest rates, the state's books looked quite good.

But these surpluses are not true signs of health. The government profited because the entire economy was being distorted, resources were being improperly allocated and profits and losses incorrectly estimated. The government's surplus was simply a transfer of some portion of private capital to the government. Granted, on paper everything looked rosy, and many people recall the 1990's as a boom time, but in reality they were a period in which the economy, though "active" was less productive (in real terms) than the decade preceding. Were it not for the capital built up in the decade preceding things would have been much worse, but still, the 1990's were a time in which we ended up consuming more than we produced.

Nor were things better in this decade. As I mentioned earlier, the post-Clinton slump of 2001, made worse by the fears inspired by the attacks on New York and Washington, was cured partly through new inflation. Thanks to post dot-com bubble fears, that new money looked for a new investment, and found it in real estate, fueling the housing bubble which had started immediately after the dot com bust. Driven partly by government policy, but mostly through the excess free cash caused by inflation, this bubble once more allowed for the appearance of a robust economy while in reality draining off our resources. And, once more, led to a collapse.

However, this time there was one significant difference. Bush did not benefit as Clinton had. He still could benefit from paying old debts in inflated dollars, and did, but he did not see the huge tax benefits Clinton did. Partly because the housing market did not allow for as much government revenue as the stock market did for Clinton, but mostly because Bush truly was dedicated to tax cuts, while congress, despite a Republican majority, was even more free spending than in the past. And so, despite another inflationary pseudo-boom, Bush did not see the surpluses Clinton did.

But I have gone on at much greater length than I intended. This was not meant to be a comprehensive look at our financial situation since 1973, though I do intend to write on that topic in the future, nor a look at the ways in which the Federal Reserve has failed to live up to its promises, or in which it inevitably fuels inflation, I have written those already. I did not even intend this to be an indictment of central planning or managed economies, those I have already written as well. All I intended to do was to argue that judging an administration by surpluses or deficits alone is an absurd measurement, and, as I think I have done that, I suppose it is time to say farewell.

So, in closing, let me say that any purely monetary measure, be it deficits or interest rate or even GDP growth, during a time of inflation or deflation, can lead us to completely incorrect conclusions. Unfortunately, as we often have nothing but monetary measures that means in some circumstances there is simply no way to draw any quick conclusions about an administration. Unless you are willing to look at a huge number of measures you cannot easily understand what the economic conditions were at a specific point in time.

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* There are too many factors to go into here, but to begin with, Reagan removed price caps that had existed since Nixon, allowing energy costs, a huge part of the CPI (both directly and indirectly), to rise with the market. This alone would have fueled an apparent "price inflation" even had the money supply remained constant. Second, there was the elimination of bad investments made during the inflationary period from 1973-1981, which caused a sharp decline in real productivity as old investments were eliminated and the assets redirected to more necessary uses. It was economically beneficially, but at first caused some economic difficulties. (This is one of many reasons it is normal to see a post-deflation slump.) Then again, CPI based indices are often a bad measure, as the CPI can often be a lagging indicator of economic growth. For example, much of the investment made in the late 1980's did not pay off in reduced production costs and lower prices until the early 1990's.

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POSTSCRIPT

I realize that in the post above I have simplified some topics. Reagan did not entire cut off inflation of the money supply, nor did any subsequent president entire avoid private borrowing. I admit that my picture may be a bit oversimplified. However, as I did not want to write a hundred pages on the topic I think simplification is acceptable, so long as it does not mislead. And, as far as I can tell, what I omitted or glossed over does not change the conclusions I draw above. In fact, if anything, a more thorough analysis would point even more clearly to the need to be suspicious of any monetary measure.