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November 1, 1994
"Deficit Delusions"
San Jose Mercury News
By Timothy Taylor
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HERE'S HOW severe America's budget deficit problems have become over the last decade. When the deficit for fiscal year 1994 (which ended September 30) came in at $200 billion, President Clinton viewed it as a success worth boasting about. To be sure, a $200 billion deficit beats the $290 billion deficit for 1992 and the $254 billion deficit in 1993. But that's a bit like saying that having your leg broken in three places is better than having it broken in five or six places. It's still broken.

More disheartening still is that although Clinton campaigned for two years against "borrow and spend" Republican policies of the 1980s and spent much of his first year in office arguing over a deficit-cutting plan, he does not seem capable of admitting why the deficit declined in 1994, nor discussing the fact that the deficit problem is far from solved, nor explaining why reducing the deficit is so important.

There are three complementary explanations for why the budget deficit has declined in the last two years. Clinton emphasizes the budget plan he pushed through in summer 1993, which cut the projected deficits by $500 billion over five years. But for the 1994 deficit, two other factors are far more important. We are now in the fourth year of President Bush's plan to cut the deficit by $500 billion over five years, which was passed back in 1990. Just as Clinton's deficit-cutting plan will have its greatest impacts in 1997 and 1998 -- if adhered to, of course -- the longer-term effects of the Bush plan are just now having their major impact.

Moreover, economic recovery always reduces the deficit, because a growing economy reduces the need for welfare payments and increases the tax base.

According to the non-partisan Congressional Budget Office, if the economy had been strong back in 1992 -- that is, if unemployment had been at 5.6 percent, not far from its present level -- then the 1992 budget deficit would have been $206 billion. In other words, the economic recovery accounts for nearly all of the difference between the actual deficit of $290 billion in 1992 and this year's $200 billion.

Of course, Clinton and his economic advisers have tried to take credit for the economic recovery. However, given that the upturn started nine months before Clinton took office, and 16 months before his 1993 budget plan passed Congress, the claim that Clinton triggered the recovery is pretty shaky.

Clinton took office when the economy was headed up and the budget deficit was headed down. He only deserves credit for giving those trends a modest additional push. But it's hard to get upset when Clinton takes credit for good news that isn't his doing, since the president always takes blame for bad news that isn't primarily his fault, either.

Thanks to the economic recovery, and the combination of the Bush and Clinton deficit-cutting plans, the budget deficit is projected to keep shrinking through 1996. But then, driven by the expected rise in entitlement spending on items like Social Security, health care and disability payments, budget deficits will make a comeback.

A $200 billion deficit for 1994 would be the lowest in the 1990s. But for any peace-time year in U.S. history up through 1982, a figure of $200 billion would look terrifyingly large. Even in the debt-ridden 1980s, the deficit was below $155 billion in 1987, 1988, and 1989, before the recession hit.

Both Clinton and Bush liked to argue that the deficit was linked closely to the short-term economy: A larger deficit would cause recession, or a reduced deficit would produce a recovery. Most economists don't agree. If anything, they believe the reverse: Cutting a budget deficit -- which means tax increases and spending cuts -- is more likely to slow down the economy in the short term.

The most negative effect of huge budget deficits is ongoing, subtle and long term. Total personal saving in the United States has hovered at around $400 billion in the last few years. Even with the reduced 1994 deficit, federal borrowing will soak up an amount equal to about half of all private saving.

With a lower deficit, some of that ended up as investment capital for U.S. industry. Without those funds, U.S. industry can either invest less, or become dependent on foreign sources of capital. For the long-term health of the U.S. economy, neither option is particularly attractive.

Over the next few decades, either lower investment or dependence on foreign capital can slow down economic growth. The effect may be barely perceptible in the annual economic statistics, but it accumulates, inexorably.

If America wakes up about one-quarter of the way into the 21st century and finds it no longer leads the world in standard of living, the budget deficits of the 1980s and 1990s will be one reason why. At that point, it will be decades too late to do much about it.

With a healthy economy and the deficit trending down, the next year is a wonderful opportunity to make both immediate and long-term progress on the budget deficit. The first step must be to rethink America's entitlement spending. But if we spend our time feeling relieved that the 1994 deficit is "only" $200 billion, I fear we won't get much further.

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