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July 2001

Surpluses, Deficits And The Debt Economy

By Seth Sandronsk

It may now be a virtue to spend the federal budget surplus as a way to sidestep a recession, Louis Uchitelle wrote April 15 in the New York Times. Why? The current economic slowdown has created a climate for this change in fiscal policy.

A funny thing happened to the US economy as it grew during the Clinton years. Federal budget surpluses emerged as a result of the government's spending less than it collected. Some called this "fiscal discipline." Others on the short end of this policy may have had a different view of it.

In the meantime, Clinton and his economists boasted that the federal budget surplus was helping to drive the economic expansion. And who with access to the circles of power in government and the news media could argue?

Spending the federal budget surplus on the American people by establishing decent health care, jobs, schools and shelter for them wasn't exactly part of the Clinton consensus. But that was then, when the high-flying stock market was in part helping to build the federal budget surplus.

It's 2001. Under the Bush administration, the nation's economic activity is slowing down. Main Street and Wall Street are feeling the pain.

Share prices have dropped. Consumer confidence has dipped. Capital investment has weakened. Corporate profitability has fallen.

The president may have a plan to turn this slowing tide in addition to his proposed $1.6 trillion, 10-year tax cut. That would be to spend the federal budget surplus and run a budget deficit to spur the economy.

Thus the Bush administration is rethinking Clinton's claim about the surplus and economic growth. Uchitelle's report addressed the tension around budget surpluses and deficits related to economic theory and practice.

One factor mentioned that facilitated budget surpluses during the Clinton era was "the public's manic borrowing and spending." Now it's quite true that life with debt marked the 1990s for American households.

At the end of calendar year 2000, the $7.2 trillion of total outstanding household borrowing reached 101 percent of disposable income versus 87 percent in 1990. The driving force behind this indebtedness? Declining and stagnating real wages for the vast majority of working Americans.

Their ability to buy goods and services with cash declined. Credit-driven consumption became more the rule than the exception for many workers. This was a way for them to maintain their living standards in the absence of good pay raises.

And as government budget surpluses rose, the debt economy grew to include more than the record household borrowing. In fact, some of the hottest indebtedness during the record economic expansion of the 1990s happened in the financial sector.

Just ask Jane D'Arista of the Financial Markets Center, an independent, nonprofit institute based in Virginia.

In her review of the Federal Reserve Bank's fourth-quarter 2000 financial statistics, she writes: "Financial sector debt soared from 31.3 percent of non-federal, nonfinancial debt in 1990 to 56.4 percent at year end 2000. Over the decade, the total debt of all financial institutions rose by $5.8 trillion, or 222 percent, far outstripping debt accumulation by households, businesses and all other sources."

By contrast, America has a $5.7 trillion national debt. Japan, the world's next-biggest economy, has a $5.3 trillion national debt.

The leading private borrowers in the US financial sector? Issuers of asset based securities (ABS). One example is car companies that issued securities based on pooled auto loans and other consumer assets, D'Arista observes.

One thing, though, about the auto loans. Thanks to the recently passed bankruptcy "reform" law, such lenders will get paid before child support payments.

At any rate, what's the result of the ABS securitization activity during the 1990s? The outstanding debt of ABS issuers rose to $1.5 trillion, up a mighty 542 percent.

D'Arista continues: "The current scale of leverage within the financial sector is unprecedented. While the repercussions of a cyclical downswing remain unclear, it seems likely that a recession could cause unusually large losses for financial institutions, given the unsupportable debt levels being carried by lenders and their customers."

Will spending government surpluses and running deficits prime the economic pump enough to counter the current slowdown? Or will the shakeout of the debt economy create a momentum that forces the Bush administration in other directions?

If the latter outcome prevails, one thing seems probable. Namely, the extent of the financial sector's indebtedness could move from the margin to the center of the news.

Seth Sandronsky <[email protected]> is an editor with Because People

Matter, Sacramento's progressive newspaper.

 

 

 

 

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