Should Reagan Get Credit for Bill Clinton’s Budget Surplus?

A friend recently wrote to suggest that Bill Clinton has gotten far too much credit for his budget surpluses. All he did, my friend told me, was to cut Reagan’s defense spending. Reagan’s massive expansion of the Department of Defense, he suggested, had succeeded in destroying the Soviet Union. By the time Clinton was elected, the need for such massive spending was no longer necessary.

In fact, Clinton benefited immensely from cutting Reagan’s massive expenditures, as did his predecessor, George H.W. Bush. But there is very little evidence to suggest that U.S. defense spending hastened the collapse of the USSR. Furthermore, Clinton  benefited mostly from the economic boom during his presidency.

The Collapse of the USSR

Did Reagan’s military build up contribute significantly to the collapse of the USSR? While a few scholars of the Soviet Union argue that case, almost all attribute its collapse to its internal corruption and inefficiency. In fact Ronald Reagan, long before he was President, foresaw the collapse for those very reasons. The most important thing that Reagan did was not to build up the US military, but to negotiate with Mikhail Gorbachev. That reduced the threat of a military engagement and allowed Gorbachev to institute policies that hastened the Soviet collapse.

Gorbachev came to power in March, 1985 and shocked his country by making a speech in which he asserted that Soviet living standards were falling and inadequate. He launched his policies of “perestroika” (restructuring the political and economic systems) and “glasnost” (openness and transparency) shortly thereafter.

The central problem of the Soviet economic system, which ultimately doomed the system, was the inability of the state to control Soviet plant managers. As a result, the managers began to barter with other plant managers to exchange goods, depriving the state of the resources it needed to meet its commitments. According to a fascinating study by Dwight Semler, what kept plant managers faithful to the demands of the central planners was their initial commitment to the successful Bolshevik revolution. Then, as ideology waned, it was Stalin’s terror – Siberia or worse. When Khrushchev unmasked Stalin and ended the terror, the incentives of the managers to follow orders diminished sharply and disappeared more or less completely under Gorbachev.

The result was a parallel economy in which the managers kept the “profits” from their plants’ production and deprived the center of revenues.

In other words, the USSR collapsed of its own internal contradictions and not from an arms race with the United States.

U.S. Defense Spending

It is certainly true that President Reagan vastly expanded US defense spending and that Bill Clinton slashed it.

The first budget that Reagan formulated was for FY 1982. His defense budget was $225.9 billion in current dollars or $543.48 billion in real 2013 dollars. (All current dollar figures for this IPE from The Economic Report of the President, 2013, Appendix B. Real 2013 dollars calculated from http://www.usinflationcalculator.com.) In real dollars, defense spending reached a peak of $715.3 billion in FY 1987 and then fell steadily to $677.9 billion by FY 1989, Reagan’s last budget.

Ronald Reagan Defense Spending, FY 1982 – FY 1989, Current and Real 2013 Dollars (billions)

Fiscal Year Budget

Current Spending

Real 2013 Dollars

1982

$225.9

$543.5

1983

250.6

584.4

1984

281.5

629.0

1985

311.2

  671.47

1986

330.8

  700.73

1987

350.0

715.3

1988

354.7

696.1

1989

362.1

637.9

TOTAL

$2,466.8

$5,178.5

When Clinton took office, the FY 1993 defense budget, set by President G.H.W. Bush, had already been cut to $583.3 billion real 2013 dollars ($363.0 billion in current dollars). In Clinton’s first budget, he cut spending to $554.3 billion real. By his last budget for FY 2001, Clinton had real defense spending down to $515.5 billion real.

Bill Clinton Defense Spending, FY 1995 – FY 2001, Current and Real 2013 Dollars (billions)

Fiscal Year Budget

Current Spending

Real 2013 Dollars

1994

$353.8

$554.3

1995

 348.8

531.4

1996

 354.8

525.0

1997

349.8

505.9

1998

 346.1

492.9

1999

 361.1

503.2

2000

 371.0

 500.2

2001

 393.0

515.5

TOTAL

$2,858.4

$4,128.56

Over his 8 years in office, Reagan spent a total of $5.178,5 trillion 2013 dollars for defense. Over his two terms, Clinton has spent “only” $4.128,6 trillion in 2013 dollars. (Everett Dirksen may or may not have said, “A billion here and a billion there and pretty soon we’re talking about real money.” But his Senate career was relatively speaking, in the primitive economic past. Now it’s a trillion here and a trillion there, leading Andrew Tisch, in the accompanying article, to suggest banning the word completely.)

In short, Clinton spent $1.049,9 trillion less than Reagan on defense in 2013 dollars.

Budget Deficits and Surpluses

When President Reagan took office, the Gross Federal Debt was $2.736,2 trillion in real 2013 dollars ($1.137,3 trillion current) and the Federal Debt held by the public was $2.224,5 trillion ($924.6 billion current). Despite signing legislation that increased taxes every year of his Presidency, save the first and the last, the debt grew relentlessly.

Federal Deficit Under Ronald Reagan, FY 1982 – FY 1989, Current and Real 2013 Dollars (billions)

Fiscal Year Budget

Current Dollars

Real 2013 Dollars

1982

-$128

-$307.9

1983

     -207.8

 -484.4

1984

     -185.4

 -414.3

1985

     -212.3

 -458.1

1986

    -221.2

 -468.6

1987

     -149.7

 -305.9

1988

     -155.2

 -304.6

1989

     -152.6

 -285.7

TOTAL

-$1,412.0

-$3,029.5

 At the end of his first year as President, the real GDP of the U.S. was $7.986,1 trillion and the real federal debt was 34.3 percent of the real GDP. By the end of the Reagan budgets, the real Gross Federal Debt level was $5.369,4 trillion with $4.101,7 held by the public. The real federal debt level had risen to 52.1 percent of the real GDP.

 Federal Deficit Under Bill Clinton, FY – 1994 to FY – 2001, Current and Real 2013 Dollars (billions)

Fiscal Year Budget

Current Dollars

Real 2013 Dollars

1994

-$203.2

-$318.33

1995

-164.0

-249.8

1996

-107.4

-158.9

1997

-21.9

-31.7

1998

69.3

98.7

1999

125.6

175.0

2000

236.2

318.5

2001

128.2

168.2

TOTAL

$102.8

$2.08

At the end of the first year of Bill Clinton’s presidency, the real U.S. GDP was $11.099,5 trillion and the real federal debt was 65.5 percent of the real GDP. By the end of the Clinton presidency, the real Gross Federal Debt was $7.568,2 trillion with $4.354,2 trillion held by the public. The real federal debt level had fallen to 56.0 percent of the real GDP.

Clinton’s Surplus

It is true then that Clinton’s budget surplus can be explained by how much less he spent on defense than did Reagan. Clinton’s budget surplus totaled $2 billion plus real. He spent $1,049.9 trillion real on defense less than Reagan spent.

But to leave it to that really misses the more important part of the story.

Federal Outlays

Federal outlays in Reagan’s first FY budget year of 1982 were $1.794,05 trillion (real), some 22.9 percent of the real GDP. By his last budget year, FY 1989, real outlays had risen to $2.141,36 trillion but as a percentage of GDP had fallen to 20.9. In total, Reagan spent $16.003,7 trillion 2013 dollars.

Real outlays in Clinton’s first FY budget year of 1994 were $2.290,0 trillion or 20.6 percent of GDP. By his last FY 2001 budget, real outlays had risen to $2.398,8 trillion but as a percentage of GDP had fallen to 17.8. In total, Clinton spent $19.054,4 trillion 2013 dollars.

In short, Clinton managed to spend $3 + trillion more than Reagan and still generate a budget surplus. Clinton spent far more than the savings from cutting Reagan’s defense spending. How was that possible?

Clinton was lucky. It is true that he raised tax rates on the two highest categories of income earners. But his luck was more important. (See the accompanying article by Joseph Stiglitz.) His presidency fell between two recessions – 1991 and 2001. His years in office were marked by both an economic boom and a stock market boom. Government tax receipts flooded in.

“Better to be lucky than smart,” my father always told me.

Marvin Zonis is Professor Emeritus, Booth School of Business, The University of Chicago and can be reached at Marvin.Zonis@ChicagoBooth.edu. Thanks to Tad Waddington, Ph.D. who provided valuable statistical analyses on which this piece is partly based. He can be reached at tad@lastingcontribution.com.

2 Responses to "Should Reagan Get Credit for Bill Clinton’s Budget Surplus?"

  1. Realist   April 9, 2013 at 1:35 pm

    We need to stop referring to the federal government "budget surplus" at the end of the Clinton administration.

    What the feds did was to generate a short-lived positive cash flow by collecting social security and Medicare taxes in exchange for vague promises to pay out far more money in the future in the form of benefits. That is no "budget surplus."