“There’s just a pattern here, where the other side continues to use the same old tired policies. They don’t work and then Democrat presidents have to come in and fix what was broken. I have this old-fashioned idea that, you know, you ought to look at the evidence and if you look at the evidence at the end of Bill Clinton’s two terms, we had the longest peace-time expansion in American history, with 22 million new jobs, a balanced budget and a surplus that would have paid off our national debt had they not been so rudely interrupted by the next administration.”

— Hillary Clinton, remarks in Hanover, N.H., July 3, 2015

Both Democrats and Republicans have their own narratives of U.S. economic history.

Hillary Rodham Clinton on the trail

FLORISSANT, MO - JUNE 23: Pastor Traci Blackmon (L) prays as Democratic presidential candidate and former U.S. Secretary of State Hillary Clinton listens on June 23, 2015 at Christ the King United Church of Christ in Florissant, Missouri. Clinton's visit to the St. Louis suburb neighboring Ferguson, Missouri focused on racial issues. (Whitney Curtis/Getty Images)

The Republican narrative often features Ronald Reagan, and how he supposedly rescued the economy from the bad decisions of Jimmy Carter with an elixir of tax and spending cuts. Hillary Clinton, in a recent speech, offers a version of the Democratic narrative — that Bill Clinton balanced the budget and left behind a huge surplus that was squandered by his successor, George W. Bush.

Given that Hillary Clinton might end up facing former Florida governor Jeb Bush in the general election, it certainly makes political sense for her to suggest that her husband rescued the economy from George H.W. Bush, only to have it wrecked by his son George W. Bush — and Barack Obama had to pick up the pieces. As she also said in her speech, Republicans “just don’t know the theory of original sin, because we wouldn’t have had to have a recovery if we hadn’t had the kind of poor management and bad economic policies that put us into the ditch in the first place.”

But does this narrative make economic sense?

The Facts

Regular readers know that The Fact Checker frowns on claims that suggest a president is responsible for every good or bad thing that happens to an economy on his watch. The U.S. economy is huge — and decisions made long ago continue to reverberate in the future. For example, some experts point to housing policies made in the Clinton administration as a contributor to the economic collapse (caused by a bubble in the housing market) at the end of the George W. Bush administration.

Thus, by drawing such a bright line between “Democratic presidents” and Republicans, Clinton runs the risk of engaging in economic sophism. But for the sake of argument, let’s examine “the evidence,” as she put it.

The Clinton campaign offered David Kamin, a campaign adviser and New York University law professor, to make the case. Essentially, he argued that the boom in the 1990s was the direct result of policies advanced by Bill Clinton, in particular a 1993 budget-deficit plan that attracted no Republican votes. Moreover, he said the shift from budget surpluses to budget deficits in the 2000s was not inevitable and was the direct result of policy choices made by the George W. Bush administration. (Under ground rules set by the campaign, direct quotes from Kamin could not be used.)

Bill Clinton’s role in the balanced budget

President Clinton’s 1993 deficit plan certainly was a political and economic gamble. Clinton believed that if he crafted a credible deficit-reduction package, Wall Street traders would bid up the prices of Treasury bonds, leading to a decline in interest rates.

Lower interest rates, the theory went, would reduce mortgage costs for homeowners and make it cheaper for businesses to obtain loans for investment and expansion. Lower overall interest rates also would give the Fed more maneuvering room to fine-tune the economy.

Clinton set a target of cutting the deficit by $496 billion over five years. Hefty tax increases on the top 2 percent of taxpayers were an important element, but Clinton also included a major expansion of a tax credit for the working poor.

Republicans predicted gloom and doom if Clinton’s plan was passed into law, but they turned out to be wrong. But it’s important to remember that Clinton’s plan was never intended to achieve a balanced budget. After the bill’s passage, the Congressional Budget Office estimated that the deficit would decline modestly — from $290 billion in 1992 to $200 billion in 1998. In the phrase of the era, there were still “deficits as far as the eye could see.”

The Clinton budget plan was actually slightly smaller, on an inflation-adjusted basis, than the bipartisan deficit-reduction package signed into law in 1990 by George H.W. Bush. Both budget deals included a mechanism known as “PAYGO” — pay as you go — which prevented lawmakers from boosting spending without paying for it with additional revenue.

Fast forward to 1995. The Democrats had lost control of the House and the Senate, largely because of bruising budget battles. Clinton’s fiscal 1996 budget proposed $200 billion deficits every year for the next five years. So, again, the target in 1998 (when surpluses later emerged) was a deficit of $196 billion.

But Republicans, who were now in charge of Congress, immediately set the goal of achieving a balanced budget within seven years. After resisting for a few months, Clinton shocked many fellow Democrats by announcing that he, too, would embrace the idea of a balanced budget. (He picked a 10-year target.)

As The Washington Post editorial page put it at the time, Republicans had forced Clinton’s hand: “Mr. Clinton’s new position on the budget is much better than the old one. He should have taken it six months ago. The Republicans have driven him to say that he too wants, if not to balance the budget, at least to get the deficit into the neutral zone.”

In other words, the policy debate in Washington substantially shifted because of the GOP takeover of Congress and its embrace of a balanced-budget goal.

Meanwhile, there were economic forces that had little to do with either Democrats or Republicans; Clinton was lucky to have become president just as a revolution in computer and information technologies was unleashed. A gusher of tax revenue emerged, primarily from capital-gains taxes, because of the run-up in the stock market, as well as taxes paid on stock options earned by technology executives.

From 1992 to 1997, CBO estimated, tax revenue increased at an annual average of 7.7 percent in nominal terms, or about 2.4 percentage points faster than the growth of the gross domestic product, the broadest measure of the economy. CBO Deputy Director James L. Blum in 1998 attributed only one percentage point of that extra tax revenue to the 1993 budget deal. The rest, he said, came from capital gains.

Between 1994 and 1999, realized capital gains nearly quadrupled, the CBO concluded, with taxes on those gains accounting for about 30 percent of the increased growth of individual income tax liabilities relative to the growth of GDP.

Dean Baker, a left-leaning economist, has written that CBO projections indicate that the stock bubble led to a $780 billion decline in the deficit after 1996. “The hero of the budget surplus story was the stock bubble,” not President Clinton’s tax policies and budgets, he says.

There were other factors as well, such as lower-than-expected health costs that reduced an expected drain on the budget. George H.W. Bush, Clinton’s predecessor, also had kicked in motion a huge decline in defense spending (which Clinton accelerated) and had overseen a painful restructuring of the banking industry. Even a potential shock, such as the Asian financial crisis in 1997, brought the silver lining of lower oil prices that bolstered the U.S. economy.

Kamin notes that after the prospect of budget surpluses emerged in 1998, Clinton adroitly blocked GOP demands for a tax cut by forcing a bidding war on how much to reserve for Social Security — a political maneuver that at least temporarily blocked the surplus revenue from being diverted to tax cuts.

Bush’s role in the disappearance of the surplus

In the 2000 campaign, both George W. Bush and Democrat Al Gore had grand plans for tapping the surplus. (In January 2001, the CBO estimated that the surplus would total $5.6 trillion over 10 years, but the campaigns had based their plans on a July 2000 estimate of $2.2 trillion — which shows how quickly these numbers can change.)

The left-leaning Center on Budget and Policy Priorities in 2000 produced an analysis that concluded that Bush’s proposed policies would tap $1.9 trillion of the surplus, while Gore had proposed using $1.4 trillion. Bush, of course, touted a $1.3 trillion tax cut, but Gore had countered with a $500 billion tax cut — and had planned to hike spending. For instance, he proposed to spend $350 billion on a Medicare prescription drug benefit. He also promised to increase spending on education, defense and the environment.

In theory, Gore had a plan to eventually eliminate the national debt, by reserving about 35 percent of the anticipated surplus to buy back outstanding bonds. But the CBPP warned that both Bush and Gore had probably underestimated the costs of their various initiatives.

As things turned out, surpluses disappeared almost as quickly as they had emerged, largely because of economic reasons.

“The stock bubble began to burst in 2000,” Baker noted. “By the summer of 2002 stocks had fallen to roughly half of their peak values, destroying $10 trillion in wealth. This gave us a recession which, although officially short and mild, led to the longest period without net job creation since the Great Depression” (before the 2008 recession).

The economy also suffered a major shock with the Sept. 11 terrorist attacks in 2001 — and, of course, the nation embarked on wars in Afghanistan and then Iraq. The PAYGO spending restraints expired, and Bush and Congress funded the wars and homeland security improvements, and a Medicare prescription drug plan, through deficit financing. (Previously, Congress generally would finance wars through increases in taxes or a tax surcharge, but Bush pushed through a second tax cut to bolster the economy.)

Within a year of the $5.6 trillion-surplus estimate, a chagrined CBO had to come back to Congress and admit that its revenue estimates were off — way off. A weakened economy, the popping of the bubble in tech stocks and other factors meant that hundreds of billions of dollars in expected revenue had turned out to be ephemeral. In just a year, capital gains returns fell 20 percent; income growth from stock options fell as much as 40 percent, the CBO estimated. Suddenly, the years of supposed surpluses had turned into deficits.

“The ending of this bubble was the biggest factor turning the surplus into a deficit. The Bush tax cuts were very much secondary in this picture, as were his wars and the Medicare drug plan,” Baker said. “The Bush administration might deserve serious grief for all three of these, but they were not the story of the end of the Clinton-era surpluses. The end of the stock bubble was the end of the budget surpluses and that one cannot be blamed on President Bush.”

Kamin points to the fact that by 2003, it was very clear that the surpluses were gone, and yet Bush persisted on additional tax cuts and deficit-financed war funding, thus digging the fiscal hole even deeper.

By contrast, Kamin said, Bill Clinton in his first year as president pushed through significant deficit reduction, which helped change the fiscal trajectory, without any votes from Republicans. Clinton, he said, maintained that fiscally prudent course by vetoing GOP efforts to pass a tax cut and instead committed the nation to fully paying down the national debt in his last budget plan. “We have started to pay down the national debt and are on a path to make the Nation debt free by 2013 for the first time since 1835,” Clinton declared in his budget introduction.

Yet this document was issued just one month before tech stocks reached their peak–and George W. Bush inherited the economic hangover caused by the end of the dotcom party. This is another example of why it is foolhardy to try to draw bright lines between presidencies.

In 2012, the CBO issued a final document demonstrating exactly how much it had erred in its 2001 forecast — and how much the swing from surpluses to deficits could be attributed to policy choices made by Congress and either George W. Bush or Obama. Only looking at the period of Bush’s presidency (through 2008), one can see that about one-third of the evaporation of the surpluses can be attributed to CBO’s forecasting errors.

In other words, much of the money that Gore had said he would have saved for paying down the debt, after paying for all of his other projects, would not have been there. Of course, we can’t go back in time and determine exactly what would have happened in a Gore presidency. But the numbers do not add up for Hillary Clinton’s claim that there would have been enough of a surplus to pay down the national debt if a Republican had not won the presidency in 2000.

The Pinocchio Test

It is certainly fair game for Hillary Clinton to compare the fiscal record of the Clinton administration with the record of the George W. Bush administration (just as Republicans like to compare Jimmy Carter to Ronald Reagan). But she goes too far to suggest that a Democrat would have preserved the surpluses and paid down the national debt, when a good chunk of that supposed surplus was based on forecasting error.

Al Gore’s tax cut probably would have been smaller than Bush’s $1.3 trillion plan, but would Gore have financed the post-9/11 wars with a tax hike? Perhaps. But he would have needed approval from a GOP-controlled House opposed to tax increases, especially in a weak economy. That would have been a contentious debate. One could also make a case that a President Gore would not have attacked Iraq — but that’s also not entirely certain, given that his vice president would have been Iraq hawk Joe Lieberman.

We can’t go back in time, but neither can Hillary Clinton. Democrats and Republicans – and the stock market – all share some credit for the balanced budgets of the 1990s. She should at least acknowledge that. Moreover, the prospect of paying down the national debt was probably just an illusion – and would never have been accomplished no matter who was president.

The Pinocchio rating in this instance is difficult, given that the issue involves some historical speculation, so we will keep it at Two.

Two Pinocchios

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