The Myth of the Clinton Surplus

[Tony Dennis]

The government can have a surplus even if it has trillions in debt, but it
cannot have a surplus if that debt increased every year. This article is
about surplus/deficit, not the debt. However, it analyzes the debt to
prove there wasn't a surplus under Clinton.

For those that want a more detailed explanation of why a claimed $236
billion surplus resulted in the national debt increasing by $18 billion,
please read this follow-up article.


Time and time again, anyone reading the mainstream news or reading
articles on the Internet will read the claim that President Clinton not
only balanced the budget, but had a surplus. This is then used as an
argument to further highlight the fiscal irresponsibility of the federal
government under the Bush administration.

The claim is generally made that Clinton had a surplus of $69 billion in
FY1998, $123 billion in FY1999 and $230 billion in FY2000 . In that same
link, Clinton claimed that the national debt had been reduced by $360
billion in the last three years, presumably FY1998, FY1999, and FY2000--
though, interestingly, $360 billion is not the sum of the alleged
surpluses of the three years in question ($69B + $123B + $230B = $422B,
not $360B).

While not defending the increase of the federal debt under President Bush,
it's curious to see Clinton's record promoted as having generated a
surplus. It never happened. There was never a surplus and the facts
support that position. In fact, far from a $360 billion reduction in the
national debt in FY1998-FY2000, there was an increase of $281 billion.

Verifying this is as simple as accessing the U.S. Treasury (see note about
this link below) website where the national debt is updated daily and a
history of the debt since January 1993 can be obtained. Considering the
government's fiscal year ends on the last day of September each year, and
considering Clinton's budget proposal in 1993 took effect in October 1993
and concluded September 1994 (FY1994), here's the national debt at the end
of each year of Clinton Budgets:

Fiscal
Year Year
Ending National Debt Deficit
FY1993 09/30/1993 $4.411488 trillion
FY1994 09/30/1994 $4.692749 trillion $281.26 billion
FY1995 09/29/1995 $4.973982 trillion $281.23 billion
FY1996 09/30/1996 $5.224810 trillion $250.83 billion
FY1997 09/30/1997 $5.413146 trillion $188.34 billion
FY1998 09/30/1998 $5.526193 trillion $113.05 billion
FY1999 09/30/1999 $5.656270 trillion $130.08 billion
FY2000 09/29/2000 $5.674178 trillion $17.91 billion
FY2001 09/28/2001 $5.807463 trillion $133.29 billion


As can clearly be seen, in no year did the national debt go down, nor did
Clinton leave President Bush with a surplus that Bush subsequently turned
into a deficit. Yes, the deficit was almost eliminated in FY2000 (ending
in September 2000 with a deficit of "only" $17.9 billion), but it never
reached zero--let alone a positive surplus number. And Clinton's last
budget proposal for FY2001, which ended in September 2001, generated a
$133.29 billion deficit. The growing deficits started in the year of the
last Clinton budget, not in the first year of the Bush administration.

Keep in mind that President Bush took office in January 2001 and his first
budget took effect October 1, 2001 for the year ending September 30, 2002
(FY2002). So the $133.29 billion deficit in the year ending September 2001
was Clinton's. Granted, Bush supported a tax refund where taxpayers
received checks in 2001. However, the total amount refunded to taxpayers
was only $38 billion . So even if we assume that $38 billion of the FY2001
deficit was due to Bush's tax refunds which were not part of Clinton's
last budget, that still means that Clinton's last budget produced a
deficit of 133.29 - 38 = $95.29 billion.

Clinton clearly did not achieve a surplus and he didn't leave President
Bush with a surplus.

So why do they say he had a surplus?

As is usually the case in claims such as this, it has to do with
Washington doublespeak and political smoke and mirrors.

Understanding what happened requires understanding two concepts of what
makes up the national debt. The national debt is made up of public debt
and intragovernmental holdings. The public debt is debt held by the
public, normally including things such as treasury bills, savings bonds,
and other instruments the public can purchase from the government.
Intragovernmental holdings, on the other hand, is when the government
borrows money from itself--mostly borrowing money from social security.

Looking at the makeup of the national debt and the claimed surpluses for
the last 4 Clinton fiscal years, we have the following table:

Fiscal
Year End
Date Claimed
Surplus Public
Debt Intra-gov
Holdings Total National
Debt
FY1997 09/30/1997 $3.789667T $1.623478T $5.413146T
FY1998 09/30/1998 $69.2B $3.733864T $55.8B $1.792328T
$168.9B $5.526193T $113B
FY1999 09/30/1999 $122.7B $3.636104T $97.8B $2.020166T
$227.8B $5.656270T $130.1B
FY2000 09/29/2000 $230.0B $3.405303T $230.8B $2.268874T
$248.7B $5.674178T $17.9B
FY2001 09/28/2001 $3.339310T $66.0B $2.468153T
$199.3B $5.807463T $133.3B


Notice that while the public debt went down in each of those four years,
the intragovernmental holdings went up each year by a far greater amount--
and, in turn, the total national debt (which is public debt +
intragovernmental holdings) went up. Therein lies the discrepancy.

When it is claimed that Clinton paid down the national debt, that is
patently false--as can be seen, the national debt went up every single
year. What Clinton did do was pay down the public debt--notice that the
claimed surplus is relatively close to the decrease in the public debt for
those years. But he paid down the public debt by borrowing far more money
in the form of intragovernmental holdings (mostly Social Security).
Update 3/31/2009: The following quote from an article at CBS confirms my
explanation of the Myth of the Clinton Surplus, and the entire article
essentially substantiates what I wrote.
"Over the past 25 years, the government has gotten used to the fact that
Social Security is providing free money to make the rest of the deficit
look smaller," said Andrew Biggs, a resident scholar at the American
Enterprise Institute.

Interestingly, this most likely was not even a conscious decision by
Clinton. The Social Security Administration is legally required to take
all its surpluses and buy U.S. Government securities, and the U.S.
Government readily sells those securities--which automatically and
immediately becomes intragovernmental holdings. The economy was doing well
due to the dot-com bubble and people were earning a lot of money and
paying a lot into Social Security. Since Social Security had more money
coming in than it had to pay in benefits to retired persons, all that
extra money was immediately used to buy U.S. Government securities. The
government was still running deficits, but since there was so much money
coming from excess Social Security contributions there was no need to
borrow more money directly from the public. As such, the public debt went
down while intragovernmental holdings continued to skyrocket.

The net effect was that the national debt most definitely did not get paid
down because we did not have a surplus. The government just covered its
deficit by borrowing money from Social Security rather than the public.

Consider the following quotes (and accompanying links) that demonstrate
how people have known this for years:

In the late 1990s, the government was running what it -- and a largely
unquestioning Washington press corps -- called budget "surpluses." But the
national debt still increased in every single one of those years because
the government was borrowing money to create the "surpluses."
So the table itself, according to the figures issued yesterday, showed the
Federal Government ran a surplus. Absolutely false. This reporter ought to
do his work. This crowd never has asked for or kept up with or checked the
facts. Eric Planin--all he has to do is not spread rumors or get into the
political message. Both Democrats and Republicans are all running this
year and next and saying surplus, surplus. Look what we have done. It is
false. The actual figures show that from the beginning of the fiscal year
until now we had to borrow $127,800,000,000. - Democratic Senator Ernest
Hollings, October 28, 1999 Video: CSPAN
An overall "downsizing" of government and a virtual end to the arms race
have contributed to the surplus, but the vast majority is coming from
excess Social Security taxes being paid by the workforce in an attempt to
keep Social Security benefit checks coming once the "baby-boomers" start
to retire.
Of the $142 billion surplus projected by the end of 2000, $137 billion
will come from excess Social Security taxes.
When these unified budget numbers are separated into Social Security and
non-Social Security components, however, it becomes evident that all of
the projected surplus throughout this period is attributable to Social
Security. The remainder of the budget will remain in deficit throughout
the next decade.
Despite a revenue shortfall, full benefits are expected to be paid out
between 2017 and 2041. The system will draw on its trust fund, a
collection of special-issue bonds from the government, which borrowed
prodigiously from the program's surplus over the years. But since the
country is already running a deficit, the government will have to borrow
more money to pay back its debt to Social Security. That's a little like
giving with one hand and taking away with the other.
The surplus deception is clearly discernible in the statistics of national
debt. While the spenders are boasting about surpluses, the national debt
is rising year after year. In 1998, the first year of the legerdemain
surplus, it rose from $5.413 trillion to $5.526 trillion, due to a deficit
of $112.9 billion... The federal government spends Social Security money
and other trust funds which constitute obligations to present and future
recipients. It consumes them and thereby incurs obligations as binding as
those to the owners of savings bonds. Yet, the Treasury treats them as
revenue and hails them for generating surpluses. If a private banker were
to treat trust fund deposits as income and profit, he would face criminal
charges.


Are intragovernmental holdings really debt?

Yes, intragovernmental debt is every bit as real as the public debt. It's
not "a wash" simply because the government owes the money to "itself."

As I explained in a previous article, Social Security is legally required
to use all its surpluses to buy U.S. Government securities. From Social
Security's standpoint, it has a multi-trillion dollar reserve in the form
of U.S. Government securities. When the Social Security system starts to
falter due to insufficient contributions to pay for all the benefits of
retiring baby-boomers, probably around 2017, it will start cashing those
securities and will expect the U.S. Government to pay it back, with
interest. The problem is, the government doesn't have the money. The money
has already been spent--in part, effectively, to pay down the public debt
under Clinton.

Update 3/31/2009: The Social Security "surplus"--which has been borrowed
by the Federal Government every year, including under Clinton to generate
the "surplus"--is now expected to evaporate within a year (2009 or 2010)
rather than the 2017 mentioned above. The following quote also provides
additional evidence that the "surplus" was indeed borrowed from Social
Security "for decades."

With unemployment rising, the payroll tax revenue that finances Social
Security benefits for nearly 51 million retirees and other recipients is
falling, according to a report from the Congressional Budget Office. As a
result, the trust fund's annual surplus is forecast to all but vanish next
year -- nearly a decade ahead of schedule -- and deprive the government of
billions of dollars it had been counting on to help balance the nation's
books....

The Treasury Department has for decades borrowed money from the Social
Security trust fund to finance government operations. If it is no longer
able to do so, it could be forced to borrow an additional $700 billion
over the next decade from China, Japan and other investors. And at some
point, perhaps as early as 2017, according to the CBO, the Treasury would
have to start repaying the billions it has borrowed from the trust fund
over the past 25 years, driving the nation further into debt or forcing
Congress to raise taxes.


The Federal Government cannot just wave a magic wand and somehow "write
off" the intragovernmental debt. Essentially, citizens invested money in
Social Security and Social Security invested that money in the Federal
Government. Now Social Security effectively owes you money (in the form of
future retirement benefits) and won't be able to pay you that money if the
Federal Government just cancels the intragovernmental debt. The only way
the Federal Government can "write off" intragovernmental debt is if it
simultaneously eliminates the Social Security system. That might very well
be a good idea, but it isn't likely. And Social Security will start
running out of money in about 2017 if the Federal Government doesn't honor
those intragovernmental holdings as real debt.

In short, if the government doesn't pay back intragovernmental holdings,
other government agencies (like Social Security) will fail. Since allowing
Social Security to fail is not a politically viable option, the debt
represented by intragovernmental holdings is just as real as the public
debt. It can't just be eliminated by some fancy accounting trick or
political maneuvering. If it were possible, believe me, politicians would
have done it already and taken credit for reducing the national debt by
trillions of dollars.

Trust Funds = Intragovernmental Debt

Social Security isn't the only trust fund in the federal budget. There are
a number of others including the civil service retirement fund, federal
supplementary medical insurance trust fund, unemployment trust fund,
military retirement trust fund, etc. All of these trust funds, like Social
Security, invest their surpluses in U.S. government bonds and increase
intragovernmental debt. And like Social Security, their surpluses really
shouldn't count toward a "surplus" because the excess money they
contribute to federal coffers actually has to be borrowed by the
government from the trust funds.

When the government declared a $236 billion surplus in fiscal year 2000,
it literally borrowed $248 billion from trust funds and considered that
borrowed money "income" which it counted towards a "surplus."

For a more detailed explanation of how the government borrowed from trust
funds and used the borrowed money to count towards an alleged surplus,
please read this follow-up article which goes into more detail on the
subject of government accounting.

The reality of the national debt

The only debt that matters is the total national debt. You can have a
surplus and a debt at the same time, but you can't have a surplus if the
amount of debt is going up each year. And the national debt went up every
single year under Clinton. Had Clinton really had a surplus the national
debt would have gone down. It didn't go down precisely because Clinton had
a deficit every single year. The U.S. Treasury's historical record of the
national debt verifies this.

A balanced budget or a budget surplus is a great thing, but it's only
relevant if the budget surplus turns into a real surplus at the end of the
fiscal year. In Clinton's case, it never did.

COMMON RESPONSES TO THIS ARTICLE
Since this article has become a popular reference for people debunking the
myth of the Clinton surplus, I have seen a number of responses made by
those that cannot seem to accept the fact that there was never a surplus.
Some of those responses are listed here and I explain why the responses
are invalid.

Adjusting the National Debt for Inflation or as % of GDP

A common tactic used by those that cling to the myth of the Clinton
surplus seems to be showing a bar graph of the total national debt
adjusted for inflation, or depicted as a percentage of GDP. When you
adjust for inflation or show the debt as a percentage of GDP, it looks
like the national debt went down for a year or two under Clinton. However,
that does not mean Clinton had a surplus, it simply means inflation was
increasing faster than the national debt or the economy was expanding
faster than the national debt. That does not change the fact that Clinton
never had a surplus.

Explained another way, adjusting the national debt for inflation is valid
for comparing the debt load of the federal government but it has
absolutely nothing to do with whether or not the federal government had a
surplus a given year. If you spend more than you take in in a given year,
you have a deficit even if your relative debt load went down because of
inflation. Explained numerically, let's say you owe $50,000, earn $30,000,
and spend $31,000 (debt load=50,000/30,000=167%)--that leaves you with a
deficit of $1000 so that the following year you owe $51,000. The next year
inflation is 5% so you now earn $31,500 and spend $32,550 with a deficit
of $1,050. $31,500 in earnings with a $51,000 debt is a 162% debt load--so
your relative debt load went down thanks entirely to inflation but you
still had a deficit of $1,050 that year and your debt continued to grow.

It wouldn't be accurate to claim that you had a surplus because your debt
load went down even though you spent more than you earned. That's what
people are saying when they try to adjust the national debt for inflation
to claim a surplus.

The bottom line is that the national debt going down as adjusted for
inflation or as a percentage of GDP is a valid metric for evaluating the
debt load of the government but it says nothing about whether or not there
was a surplus. If the total national debt went up, there was a deficit.
Those that think a decrease in the debt load of the federal government as
a percentage of GDP or adjusted for inflation is equivalent to a same-year
surplus don't understand the definitions and purposes of each of these
terms.

Congressional Budget Office (CBO) vs. These "Partisan" Numbers

Another common response to the above explanation of the myth of the
Clinton surplus is that the budget surpluses are based on the numbers
produced by the non-partisan Congressional Budget Office (CBO). Indeed if
you access the CBO's "historic budget data" document , on the fist page
you will see that 1998 shows a surplus of $69 billion, 1999 shows $126
billion, 2000 shows $236 billion--the same surpluses claimed by Clinton
and CNN in the article mentioned at the top of this page.

However, further analysis of the document should make it very clear that
important information is missing from the CBO document--specifically
focusing on the last two columns of the table on page 1. If you take the
$3,772.3 billion debt held by the public at the end of 1997 and subtract
the "total" $69.3 billion surplus stated for 1998, you would expect to see
the debt go down by 69.3 billion to $3,703 billion. Instead, the debt
indicated for 1998 is $3,721.1 billion--suggesting a surplus of only $51.2
billion. This alone should tell you that the CBO numbers aren't telling
the whole story because they don't add up--and the story they aren't
telling is intragovernmental holdings.

The reality is that the federal government and politicians use a form of
accounting that would get most accountants thrown in jail. As USA Today
wrote in 2007 , special rules used by the federal government allowed it to
report a $248 billion deficit in 2006 rather than $1.3 trillion if it had
used corporate-style accounting.

While the CBO may be non-partisan, that does not mean the CBO is non-
political nor that their numbers are honest or transparent.

Update 4/26/2009: Please read this note where President Obama, too, is
trying to get certain government expenditures not "counted" in the
official CBO deficit even though they'll cost billions of dollars and
increase the national debt. As this paragraph has explained, CBO numbers
are not to be trusted as an accurate reflection of reality.


The fact remains that the total national debt, as explained above, is the
only real measure of what we owe. We can discuss the meaning of the
different columns of the CBO documents and what they do and don't include,
and we can argue about the accounting tricks that the federal government
uses for political reasons. But the fact remains that the Bureau of the
Public Debt is responsible for the daily reporting of the total national
debt. Regardless of how politicians play with the budget numbers, the
current national debt reported by the Bureau of the Public Debt is what we
owe. If, at the end of each year, we owe more than we did the previous
year, politicians can call it a surplus until the cows come home--but the
fact remains that we owed more money than we did the previous year.
Playing accounting and political games to call it a "surplus" doesn't
change the fact that we're even more in debt than we were the year before.

During the Clinton years, the total national debt increased every year.
Only in Washington D.C. would that somehow be considered a "surplus."

There was a Surplus Not Counting Interest and "Off-Budget" Items

It is sometimes claimed that there was a surplus but the national debt
didn't go down because of interest payments on the existing debt, or
because of "off-budget" items. Anyone that makes this claim is just buying
into twisted Washington accounting games that are convenient for their
argument.

The reality is that "off-budget" items and interest payments on the debt
are real government expenditures just like any other. Off-budget items are
declared as such by the stroke of a pen specifically for political reasons
but it does not change the fact that they are part of government expenses.

To demonstrate the fallacy of this argument, consider this: We have a
budget surplus right now, too, if we declare the department of Health and
Human Services to be "off-budget." After all, Congress and the president
can do that with the stroke of a pen. Presto, we now have a surplus!

Of course, we wouldn't really have a surplus. And neither did Clinton.
It's just a matter of saying that some expenses don't "count" even though
they do.

There Was a Surplus But It Wasn't Used to Pay Down The Debt

Some people claim that there was a surplus but it wasn't used to pay down
the debt. They claim that one issue is whether or not you have a surplus
and another issue is what you do with it; hence they also claim that you
can have a surplus and not have the national debt go down.

However, this is not true.

If there was a surplus and it wasn't used to pay down the debt, then that
means it was spent--which means even if there could have been a surplus,
it evaporated the moment it was spent. During the Clinton years, not only
was it spent--the government borrowed even more! Every year!

It's like earning $30k in a year and only having $29k in expenses--so you
have a $1000 surplus. To celebrate, you then go out and spend $2000 on a
new LCD TV. All the sudden you earned $30k and spent $31k and what
originally looked like a $1000 surplus is now a $1000 deficit and you're
even further in debt. You almost had your financial house in order but
then you went out and spent the "extra" money rather than saving it or
paying off some of your existing debt.

In short, if the government had a surplus and spent it on anything other
than paying down the national debt, there was no longer a surplus the
moment the money was spent on something else.

Comparing National Debt on January 1st

Some have responded by saying that Clinton had a surplus and paid down the
debt because, when they compare the national debt from one January 1st to
the next, the debt does show a decrease. This may be an honest mistake,
but the government's fiscal year is from October 1st through September
30th. All government and budgetary activities are based on that fiscal
year so it is necessary to do debt comparisons using that same fiscal
year. As a result, all comparisons should be made either on September 30th
or October 1st... not January 1st.

FactCheck.org Says Clinton Had a Surplus

FactCheck.org repeats and uses the same government numbers that this
article illustrates to be misleading. Further information on why the CBO's
numbers (and FactCheck's numbers) are misleading is explained in my
follow-up article here

The Link Provided Above is Allegedly False

Some people have claimed that the link I provided
(http://www.treasurydirect.gov/NP/BPDLogin?application=np) is an
illegitimate or fraudulent site that provides false numbers. I don't know
where that accusation comes from or why people think that, but I've seen
at least some comments that criticize the link because it doesn't point to
http://www.ustreas.gov/. To verify that my link is to a valid government
information source, please follow these steps:

Go to the U.S. Treasury website: http://www.treasury.gov/
Scroll to the "Bureaus" section and click on "Bureau of the Public Debt"
which takes you to http://www.publicdebt.treas.gov/
Scroll down to the section "The U.S. Public Debt" and click on "See the
U.S. Public Debt to the Penny."
This takes you to the link I originally provided:
http://www.treasurydirect.gov/NP/BPDLogin?application=np

The assertion that my article points people to a fraudulent website is
incorrect. I am providing a direct link to the U.S. Treasury, Bureau of
the Public Debt, National Debt to the Penny website. This is the official
website that the U.S. government provides which allows the public to track
the debt.

http://www.craigsteiner.us/articles/16