|Figure 1. Financial sector balance flows add to zero at each point in time in accordance with the three- sector relationship.|
- When private saving increases (blue line) public deficit increases (red line).
- The oil crises that caused high oil prices in the 1970s resulted in a recession characterized by unusually high private saving and increased public deficits. Such is the signature of recessions.
- During the 1980s, the Reagan tax cuts in 1981 increased public deficits contrary to “supply side theory.” In any event, the recession of 1982, possibly triggered by tight money policies, dominated the economy. The stock market crash in 1987 was laid at the feet of high deficits though high imports contributed to the deficit.
- H W Bush promised in 1988 to hold the line on taxes, just read his lips. But, deficit hysteria put pressure on him to do something. In 1990, he reached a compromise that resulted in some tax increase. Then the recession of 1992 took over, private savings and deficits increased in unison and Bush lost reelection.
- During the Clinton years, 1992-2000, a combination of tax increases and spending restraint produced both a public surplus and competition between Democrats and Republicans to take credit for what was interpreted to be a successful budget outcome.