November 1, 1994
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
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 $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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