Early in 2000, in a private home in Boca Raton Florida, I was seated next to then Presidential Candidate Al Gore at a fundraiser/dinner to discuss the economy.
The first thing he asked was how I thought the next president should spend the coming $5.6 trillion surplus forecast for the next 10 years. I explained that there wasn’t going to be a $5.6 trillion surplus, because that would mean a $5.6 trillion drop in non government savings of financial assets, which was a ridiculous proposition. At that time the private sector didn’t even have that much in savings to be taxed away by the government, and the latest surpluses of several hundred billion dollars had already removed more than enough private savings to turn the Clinton boom to the soon to come bust.
I pointed out to Candidate Gore how the last 6 periods of surplus in our 200+ year history had been followed by the only 6 depressions in our history, and how the coming bust due to allowing the budget to go into surplus and drain our savings would result in a recession that would not end until the deficit got high enough to add back our lost income and savings, and deliver the aggregate demand needed to restore output and employment. I suggested the $5.6 trillion surplus forecast for the next decade would more likely be a $5.6 trillion deficit, as normal savings desires are likely to average 5% of GDP over that period of time.
And that’s pretty much what happened. The economy fell apart, and President Bush temporarily reversed it with his then massive deficit spending of 2003, but after that, and before we had enough deficit spending to replace the financial assets lost to the Clinton surplus years (a budget surplus takes away exactly that much savings from the rest of us), we let the deficit get too small again, and after the sub-prime debt driven bubble burst we again fell apart due to a deficit that was and remains far too small for the circumstances.
For the current level of government spending, govt is over taxing us and we don’t have enough after tax income to buy what’s for sale in that big department store called the economy.
Anyway, Al was a good student, and went over all the details, and agreed it made sense and was indeed what might happen, but said he couldn’t ‘go there.’ And I said I understood the political realities, as he got up and gave his talk about how he was going to spend the coming surpluses.
