June 12, 1996
"Peace Pays Off - The Federal Deficit is Down Thanks to Reduced Defense Spending"
San Jose Mercury News
By Timothy Taylor
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One of Bill Clinton's election-year boasts is that the budget deficit has fallen for four straight years. The $140 billion deficit projected for 1997 would be 1.8 percent of gross domestic product, the lowest percentage since 1979.

But the biggest single cause of the lower budget deficits isn't clever Clintonomics - it's the crumbling of the Soviet Union.

Although you wouldn't always know it from the way some folks talk, America has cut its defense spending substantially since Soviet power declined in the late 1980s. In 1989, the defense budget was $304 billion. Next year, it's projected to be $259 billion, which works out to a cut of 15 percent over eight years.

But that calculation greatly understates the real decline in defense spending. If the 1989 level of defense spending had stayed frozen at the same real buying power, but increased with inflation, it would have reached $385 billion by 1997. From this perspective, the proposed 1997 defense budget is a real cut of one-third from 1989 levels, worth about $125 billion dollars.

By an alternate measure, defense spending has fallen by an even larger proportion. The Reagan-era defense build-up peaked at 6.5 percent of gross domestic product in 1986. If defense spending had stayed at that level, it would be hitting $500 billion in 1997.

But in Clinton's proposed 1997 budget, defense spending will be 3.4 percent of GDP. Thus, measuring defense spending as a proportion of the economy, it has fallen by almost half in a little more than a decade.

So if the country has cut defense spending by a third or half, saving $125 billion or more each year, depending on the method of comparison, where did the money go?

The peace dividend wasn't refunded as a tax cut. The tax take of the federal government hovered about at 19 percent of GDP in the late 1980s, and is projected to hit 19.4 percent of GDP in 1997.

However, the decline in defense spending has helped federal spending, measured as a share of the economy, to shrink. Federal outlays were 23.5 percent of GDP in 1986, but should drift down to 21.2 percent of GDP in 1997.

With taxes moving little, and lower overall spending, the budget deficit shrunk. In 1997, the inflation-adjusted deficit will only be about half of what it was in the mid-1980s.

Of course, one can slice and dice the budget numbers of the last decade in lots of ways. Congress never specifically voted on what to do with the defense savings.

However, a reasonable summary of the last decade of budget policy is that we devoted the peace dividend to reducing the deficit. The rest of the budget scuffling has been about how to trim back other areas of the budget to accommodate higher spending on entitlement programs for the sick and aged.

Bill Clinton's budget policy deserves a mild amount of credit for not indulging his more open-handed Democratic allies in a spending binge, and for restraining his more open-handed Republican opponents from a tax cut, either of which would have widened the deficit.

But without the disintegration of the Soviet Union, and the resulting bipartisan agreement to cut defense spending over this last decade, it's difficult to imagine that the president and Congress would have agreed upon an alternate way to cut spending or raise taxes by $125 billion a year. The peace dividend has been the main difference between a declining budget deficit projected at $140 billion next year, and one that might otherwise be hovering near $300 billion.

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