In October of 1998, less than a week after he had become the subject of an impeachment hearing, President Clinton sat down to negotiate the 1999 budget with Republican leaders. Clinton was dealing with not just a Republican majority in the House under Newt Gingrich, but a Republican-controlled Senate guided by Trent Lott. Considering the battering his personal reputation had already taken, the specter of the upcoming circus in the House, the excitement among the Republican base, and the strong position of the Republican legislators, it might have been expected that Clinton would emerge from this encounter battered and scoring few, if any, victories. But in the end, Clinton came out of the negotiations holding a deal that left Democrats excited and Republicans pouting. Not only did the budget deal expand funds for education, it included new funds to fight global warming, expanded funding for the EPA to clean up polluted waterways, and a number of funding increases for other Democratic priorities. While Clinton wasn't able to convince the Republicans to go along with higher rates for oil companies seeking to drill on federal land, he traded standing pat on those rates for an agreement to limit road building in wilderness areas. Most of all, Clinton thwarted the biggest announced goal of the Republicans -- cutting into the growing surplus with a flurry of tax cuts. Just three weeks later, voters went to the polls and handed Republicans one of the worst losses for a party not occupying the White House.

The result was that 1999 brought a new record surplus, and in the fall of 1999, Clinton was ready to negotiate again. Though not with Newt Gingrich. Newster had failed to deliver at both the negotiating table and the voting booth, and his party was done with him by then. For the 2000 budget, Clinton again fended off attempts to drain the surplus through tax cuts. The result was the largest surplus in history, and the first time the federal government had posted three consecutive years of surplus since the 1940s.

What made these budget surpluses possible was not something that happened in 1998 or 1999, it was something that happened in Clinton's first year in office. In 1992, the last year before Clinton took office, the deficit grew significantly. In 1993, the Omnibus Budget Reconciliation Act took action against the deficit in a way that proved directly and immediately effective: it raised taxes, and it raised them most for the rich. Those earning around half a million a year saw their taxes jump from 29% to 36%. Those at the very top were hit with a surtax that set an effective tax rate of just under 40%. The bill also removed the cap on Medicare taxes. It set that much despised 35% corporate tax rate. It even included a 4 cent per gallon gas tax.

What was the economy crushing, job destroying effect of all this? Not only did the government immediately begin to pull in additional revenue and cut into the deficit, but the economy grew as well. In 1992, with taxes low, the US hit a 15 year high in unemployment at 7.6%. At the end of 1993, following the tax increases, unemployment had dropped by half a percent. It kept dropping. It was down again in 1995, and 1996, and 1997, and 1998. By 2000, the unemployment rate had settled around 4% for three solid years. A figure sometimes referred to as "full employment."

This long surge of growth, prosperity, and surplus would not end until George W. Bush became president and shepherded through the Economic Growth and Tax Relief Reconciliation Act of 2001. This act cut taxes, with by far the largest benefit going to those at the top. The highest bracket was reduced to 35%, capital gains taxes dropped to 8%, the size of untaxed estates was sharply increased. US industry responded almost immediately... by cutting jobs, moving more work overseas, and channeling more funds to those at the top. In the next four months, before the 9/11 attacks, unemployment spiked. At the same time, the budget surplus evaporated.

In just over one year, the Bush tax cuts converted the largest surplus ever into a growing deficit, and while deregulation of fiscal markets did help to create a revenue boost after 2004, that boost never brought the budget close to balance. Eventually any gains created were more than erased by the destabilization of the economy.

The result of the Bush years was that by 2008 the US was facing growing deficits at the same time there seemed little choice but to pony up trillions to save the financial institutions and try to keep what remained of the economy breathing. As a result, about a third of 2009 and 2010 budget deficits were directly due to efforts to salve the hideous results of deregulation and "creative" finance. But that's no longer true. The amount of stimulus and bailout money going into the federal budget has dropped precipitously, and will keep dropping.

The difference between the surplus years of 1997-2000 and the current deficit comes down to three things: the soaring defense budget driven largely by the wars in Iraq and Afghanistan, the growing giveaway to the rich written into the Bush tax cuts, and the decline in revenues directly related to the economic downturn. Which makes it more than a little incredible that the budget deal addressed none of those issues.

How can that be? To start with, Bush era tax cuts, the one part of this problem which is growing faster than any other, were taken off the table before the budget fight really began. Despite a lot of talk the contrary, it appears as if the Defense Department budget will not be reduced, and rather than putting any additional spending toward programs that might stimulate the economy, the budget will defund those programs more rapidly. Most of the budget fight was conducted over items that not only didn't grow in the last year, they didn't grow in the last decade, with the majority of programs designed to help the poor. The wealthy are being asked to kick in... well, all the details aren't clear yet, but it looks like the sacrifice at the top will be giving up a big fat zero.

President Clinton, in the midst of a tough fight for this own political life and facing Republican control of both legislative chambers, emerged from negotiations with a deal that protected the budget while forwarding Democratic interests. Clinton was, and is, an acknowledged centerist, but he carved out a deal that protected the poor even as he was agreeing to give the Republicans some of what they wanted on the business side. He managed this by not only making his case behind closed doors, but in public. He did it by staking out a negotiating position and sticking with it. He did it by playing chicken with the Republicans in the budget showdown of 1995 and not blinking. When the GOP sat down with Clinton for those negotiations, they did it knowing they were dealing with someone who would take it to the wall and beyond.

Mostly Clinton won at the negotiating table by being willing to lose. By being willing to take a blow. By being willing to be disliked. By being ready to sit there as long as it took to strike a reasonable deal. He won by not surrendering.

That's a tactic that someone at the current White House just might want to research. Maybe it's time that President Obama set down his Reagan hagiography and start carrying a copy of Clinton's memoirs.

Sources

Critics still wrong on what's driving deficit in coming years, Center on Budget and Policy Priorities

Clinton's Economic Plan: Impact on individuals New York Times, 18 Feb 1993

Omnibus Budget Reconcillation Act of 1993, Wikipedia